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Taking the Next Step: Should You Form an LLC or Corporation?

 

Starting your own business is a major milestone for many, one that takes years of hard work to achieve. It’s also an overwhelming process, and requires a great deal of research and planning. Depending on the kind of business you have, you are probably considering whether forming an LLC or corporation is in your interests. Each one has a specific set of positives and negatives, and some truly serious drawbacks depending on your specific needs. The following article may prove helpful in getting you to consider the next step in officially structuring your business.

 

Business Definitions

LLC is an acronym for Limited Liability Company, which is a structure that protects the personal assets of the business’ owners. If there is ever any trouble with debtors, legal infractions made, or creditors need to get involved in a legal trial, they will not go after the business owner’s assets. So, this is a way of keeping your personal property from being treated as collateral when managing the affairs of your small business.

In a corporation, the business owner is called a shareholder, and as an owner, you would also be considered an employee of the enterprise, which entails paying yourself a reasonable salary. A corporation’s profit margins, losses, and deductions or credits are all subsequently taxed on the shareholder level. 

 

Taxation

When it comes to taxes, LLCs and corporations are fundamentally different. In a corporation, the LLC is not a business entity or one of sole proprietorship so it’s a specific method of determining the way your business will be taxed, Further, the difference between an LLC and corporation is that the latter helps you to avoid the issue of double taxation. With an LLC on the other hand, members need to pay self-employment taxes to their Medicare and Social Security directly to the IRS. These tax rates are not fixed and can change on an annual basis. Any income generated by an LLC is considered taxable income. 

 

Management Structure

Another key difference between LLCs and corporations is the management structure. When a business owner manages an LLC with other board members or colleagues, it functions as a partnership between them. If, however, there is only one owner, then it would be managed as a sole proprietorship.  

A corporation’s management structure would be a bit more intricate and would have directors and officers, as well as a board of directors that oversee corporate formalities and major decisions. 

Note About Entrepreneurs

If you’re just starting out, it might be difficult to figure out which approach is best for you. Usually, an LLC is helpful to begin with since it offers more flexibility in terms of liability protection and tax write-offs. Although, you may need to change your business to a corporation later on as it grows and becomes more successful. It all depends on your needs.

 

Given the complexities entailed in taxes and management structures, it might be helpful to get a consultation with a business advisor to help you with figuring out which entity works best for your business. A bit of research is required before going through the legal rigamarole and setting up the paperwork. But once you’re done with that, you’ll be well on your way. 

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