For new business owners, it can seem strenuous to select the difference between operating as an LLC versus a corporation. Excluding soul proprietors, business organizations must register as a specific business type with the state in which they operate.
Although there are many similarities between a corporation and an LLC, one of the main difference is the ownership aspect. Corporations are owned by shareholders, while an LLC is owned by its members. An LLC has complete autonomy to issue its proprietorship portion to its constituents regardless of their investment amount. When it comes to profit distribution in an LLC, an operating agreement may identify equal profit sharing among all associates. This is important to consider since some members may have contributed less than other members during the operation. An operating agreement is a legally binding document used to set up the internal organization of an LLC and members’ roles within an LLC.
In a real estate LLC for an example, a Real Estate LLC Operating Agreement is a basic format template containing basic LLC information, member information, management structure, financial administration, and other miscellaneous details. Although not required by many states, it’s a great idea to have one. On the other hand, there are two different types of corporation, C corporations and S corporations, whose owners are the shareholders.
The next biggest variation between an LLC and a corporation is their taxation laws. A corporation is able to be taxed as a C corporation or an S corporation. An S corporation is a fiscally-transparent entity, meaning they are exempt from paying corporate income tax. instead, they turn it over to its shareholders who pay personal taxes associated with their shares. However, an S corporation must meet a number of restrictions to be taxed this way, such as having only one class of stock, with no more than 100 shareholders. Additionally, those shareholders must be non-alien residents. A C corporation pays corporate income tax similar to workers who pay an income tax. It may distribute income to its shareholders, by paying a dividend, and those shareholders would pay income tax on that allocation. This is often referred to as double taxation.
LLC’s with just one member are taxed as a sole proprietorship, while an LLC with more than one member is taxed like a partnership. LLC’s are also not subject to restrictions in order to be taxed as a flow-through. Furthermore, they may determine whether to be taxed as a C or an S corporation by meeting a few requirements and registering an indenture with the IRS.
When starting a business, it’s always advised to protect yourself and your assets through asset protection. The goal of a comprehensive asset protection plan is to significantly reduce or prevent your business and personal assets from the claims of creditors. Unfortunately, many small business owners are unaware of the dangers faced that can harm their businesses such as employee caused damages, debt obligations to third parties and vendors, consumer-protection issues, and product or professional liability to name a few. Knowing the risks and avoiding them maximizes a business’ chance of success.
In addition to protecting a business, a legal entity management advocates conformity by tying all corporate filings in one place. Legal entity management is a method of integrating corporate duties involving the management of the flow of information in and out of a company. These systems have gained popularity recently for their ability to securely facilitate sensitive documents and data.
A sound business plan anticipates the future and plans accordingly, in the event of a tragedy. Operating survivors may be left without direction afterward. Estate planning allows owners to ultimately decide exactly who will benefit from their estate, and to what extent. Estate planning also ensures that the estate will not be ruined by taxes imposed on the transfer of assets after the death of an owner.
Since any small business is one lawsuit away from going out of business, it is critical to have easy access to a small business lawyer. Starting a small business almost always requires an attorney, a banker, and a CPA or accountant. Already having a lawyer knowledgeable in your business’s industry and policies allows them to assist you right away in the moment of necessity.