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Corporation or LLC? Which business model to choose

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The LLC itself does not file taxes as a separate legal entity, the owners pay taxes on profits directly

New businesses are being formed all the time. As of March 2020 there were more than 800,000 businesses that were less than a year old in the United States according to Statista.

Entrepreneurs are spoiled for choice when it comes to selecting the appropriate business model, each with its own benefits and requirements. Among the more popular forms of business structures are the LLC and corporations. Let’s take a closer look at what each business structure entails. 

The difference

The acronym “LLC” should reveal the first clue as to the major differences between the two. The limited liability company is similar to a corporation, but offers more flexibility and fewer recordkeeping requirements. This hybrid business structure combines elements of the partnership with the liability protection found in corporations. Technically the LLC can be viewed as a type of corporation, albeit one that is quite flexible. The LLC itself does not file taxes as a separate legal entity, the owners pay taxes on profits directly. This taxation element removes the separation of business and personal taxes. The LLC is a relatively new business structure that is becoming increasingly popular and has seen some strong upward growth while the popularity of other business structures seems to have declined according to the IRS.

The corporation offers a predictable structure, perpetual life and easy transferability of shares – a rather attractive feature for outside investors. 

Both forms of the business entity are created by filing formation documents with the state and both provide owners liability protection. In both cases the owners are in general not personally responsible for business obligations of the LLC or corporation. In some cases this protection can become null and void. 

Registered agent

Whether you are starting a corporation or an LLC, you will need to appoint a registered agent. You can appoint yourself or make use of registered agents. The registered agent is a person or entity that is appointed to accept service of process and official mail on behalf of the corporation or LLC. 

A lawsuit against a business entity can not move forward unless the business has been properly notified first. This is where the registered agent steps in. The registered agent must have a physical address within the state that the business entity operates in and be available during business hours. These requirements make it easier for the court to find and notify the relevant parties. Big corporations can’t hide behind thousands of employees, as the registered agent is the business’ point of contact with the state and for service of process. 

Clarifying S corporations

The LLC is seen as a type of business entity while an S corporation is a tax classification. This lets the IRS know that the business should be taxed as a partnership. To become an S corporation the business must first register as a C corporation or LLC then the business must meet certain criteria set aside by the IRS to qualify. 

The S corporation provides limited liability protection and offers corporations with 100 shareholders or less to be taxed as a partnership. These businesses cannot be owned by individuals who are US citizens or permanent residents. A further limitation on the ownership of S corporations entail that this business entity cannot be owned by another corporate entity. These businesses are more rigidly structured and require strict regulations on adapting corporate bylaws, conducting initial and annual shareholders meetings and keeping company meeting minutes. Extensive regulations apply when issuing stock shares and the S corporation may use either accrual or cash basis accounting practices. 

What is a C Corp?

The C in C corporation stems from the fact that this business entity is taxed under subchapter C of the Internal Revenue Code. This is the double taxation law that C corps are known for. These business entities exist separately from their owners and can be taxed, make a profit and be held liable. This business structure offers the highest level protection from personal liability for the owners/founders. 

C corps can issue stock and shareholders can sell their stock and/or leave the business without it influencing the life of the corporation. This business structure is typically chosen for a company that plans on going public in the future. 

Starting a business is a new and exciting venture and choosing the right business structure is as important as the product or service you want to provide. Whether opting for a LLC or a variant of the corporation, the business structure will dictate how the business grows. 

 

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