By Jonathan Feniak, Esq., MBA
Sometimes the path to owning your own company looks like someone spilled alphabet soup all over it. Between LLC and CORP and INC, you're left scratching your head. Anyone would be. Thankfully, we're here to help clear it up for you.
Corporations tend to come into play when larger amounts of capital are on the line and more complex ownership structures are required. limited liability companies come into play when the business is modest, with few owners involved in the business and less need for complexity.
Most first-time business owners will find themselves starting an LLC. But why? Why not jump in and go corporate? What's the difference?
There are so many questions racing through the mind of most first-time business owners. Our suggestion, after reading this, is to speak to a business lawyer and an accountant in your area. They can help guide you based on the specifics of your individual business situation and potential outcomes.Order Now
An LLC is a limited liability company, but what does that mean? It's a way for small business owners to protect their personal assets while also investing in their company's future. For instance, Tod owns a small restaurant. He has created an LLC to protect himself from lawsuits, potential losses, and bankruptcy. While an assets owned by the LLC will be up for grabs, Tod's home, car, and bank account will not be. As an added bonus, Tod will also appears to be a stronger professional if he operates his business as an LLC.
An LLC will show the world he is personally and financially invested in his company's outcomes and growth. This may help him attract business partners, investors, and employees to continue to grow his brand and business. Fantastic. The LLC will protect Tod, his family, and his business for years to come.
Both LLCs and corporations allow the owner of the business to seek investors. Both options provide tax benefits an individual business owner would not receive if they were not incorporated or an LLC. Both provide the owners and shareholders with limited liability. Last but not least, each provides the public with insight into the company's potential as something larger than any single person.
Or perhaps Tod has a bigger mindset. He sees a need for a large produce company in his area. He can import fruit from growers in the area, sell it at a tidy profit, and continue to grow from there. He incorporates because this business will have a great deal of sales, which will require a great deal of equipment like trucks, warehouses, and many employees as well. A corporation may make it easier to attract investors because it will allow him to sell shares of his company without giving those investors a say in how the company is run or having to file complicated tax returns.
This is a corporation's single greatest difference from an LLC. LLCs have members, part of the team, who own a certain percentage of the company. Corporations have stocks which, while they entitle a shareholder to a percentage of the company's profits, can be traded and sold for monetary gain. LLCs don't have that option available.
While corporations have been around for a very long time, LLCs are still the new kid on the block. This doesn't mean you'll appear outdated by forming your business as a corporation, just that your business may be taken more seriously and positioned to grow.
In taxation, corporations generally have a more complicated tax structure than LLCs. Corporations can taxed as type C Corps or S Corps, and LLC can choose to be treated as pass-through entities or S Corps. Choosing the type of taxation can be very complicated so it is best to check with an accountant or attorney if your tax situation is complicated.
Corporations are also, almost always, required to have yearly shareholder meetings. If your business is small, does not have outside investors, or does not need more complex taxation, it may not yet be time to become a corporation. An LLC may be a better choice for you and your company for right now. If you’re planning on opening an LLC, we have many helpful resources on our blog including information about articles of organization, EINs, Colorado business licenses, and sole-proprietorships.Order Now