Corporation or LLC, which is right

By The Modern Accountant in Accounting Rules & Regulations / no comments

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Many people wonder whether they should have a limited liability company or a corporation for their business. In order to find out which one is right for your business you will need to take a look at the various advantages and disadvantages of each type of business structure and then make your choice.

Here are the main advantages you will get if you decide to incorporate your business:

1. Limited Liability ? this is a probably the best advantage that you will get if you incorporate your business. In most business structures the owner assumes all of the liability of the company, but when a business becomes incorporated the amount of your liability is limited to the amount of money that you have actually invested in the company. For example if you are a sole business owner then your car or house can actually be seized to pay any debts that your business might owe. But in a corporation the only way that you can be held responsible is if you have given a personal guarantee.
2. Corporations Carry On - basically a corporation has an unlimited life span where as other business structures will cease to exist in certain scenarios. What this boils down to is that a corporation will continue to exist if the ownership of the business changes, if the shareholders die or leave the business, it doesn?t ever go away.
3. Raising Money Is Easier - it is a known fact that corporations actually have an easier time raising money and because of this you will have an easier time growing and developing your business. The reason that they have an easier time is that corporations can actually not only borrow and incur debt but they can also sell shares and raise equity capital. This is a huge advantage because equity capital for the most part does not have to be repaid and it incurs no interest. But when you are issuing shares you are also reducing your percentage of ownership in the business.
4. Income Control ? if you are a corporation you can be the one to determine when you personally receive income, which is a huge tax advantage. Basically what this does is that instead of getting your income when it is received it allows you to take your income at a time when you?ll pay less tax.
5. Potential Tax Deferral ? this is not a guaranteed thing, but more like an opportunity when it arises. But this works because you can defer paying some tax until a later time so this may make you be able to realize a tax savings because it might put you into a lower tax bracket or you might be able to put it off until tax rates have fallen. This depends on what happens when taxes actually come due.
6. Income Splitting ? this works because corporations pay dividends to their shareholders from the company?s earnings. So this allows you to split the income how you see fit. This can work because a shareholder does not have to be actively involved in the business to receive dividends. So you can spilt the income with people in your family so that not all of it is getting taxed at the higher tax rate, basically you will be redistributing income from a higher tax bracket to a lower tax bracket
7. The Small Business Tax Deduction ? if you have a small business and you decide to make it a corporation you might qualify for the small business deduction. This is an annual tax credit that is calculated at the rate of 16% on the first $200,000 of taxable income. This can actually be a much lower tax bracket than that applied to your personal income.
8. Increased Business ? this isn?t always a guarantee but for the most part people tend to perceive corporations as being more stable than other business, it just has something to do with the name. Not to mention that in some cases, such as contractors, some companies will only do business with you if you are a corporation because of liability issues.

Here are the disadvantages of having your business as a corporation:

1. Registering a corporation is expensive ? they are very costly to set up. The reason for that is because they are a more complex legal structure than other business structures so creating one is going to be more complicated which requires more costs. These fees can range in the hundreds for small businesses, for the set up alone. And these set up fees can be higher for large businesses.
2. Liability May Not Be As Limited As You Think ? most people think that they are protected from everything if they have a corporation, but this can be undercut by personal guarantees or even credit agreements. This becomes an issue if others won?t give the corporation credit. This usually happens because the corporation is new so they have limited assets which mean they don?t have enough to secure a loan so the banks and other lenders require guarantees from the owners. What this means is that if you default in repayment obligation on those you can be held liable, meaning lose your car or house.
3. Less Tax Flexibility ? this area affects business losses. If you own the business on yoru own or with somebody else and your business suffers a loss you can use those losses to actually lower other types of personal income in the year that the losses occurred. But in a corporation if you have a loss they can only be carried forward or back to reduce the corporation?s income from other years.
4. No Personal Tax Credits ? this can actually be a tax disadvantage for your business because the corporation isn?t eligible for personal tax credits. So in other words every dollar that the corporation earns is taxed. Sole owners and partnerships can claim tax credits that corporations cannot.
5. Increased paperwork ? with a corporation there is a lot more paperwork involved just to maintain the corporation. An example of this is that corporations are required to maintain a minute book, and in this book you have to have the corporate bylaws and minutes from all corporate meetings. But you also have to keep all of the corporate documents up to date at all times, which means you are going to be facing a ton of paperwork.
6. Another Tax Return - if you decide to have a corporation you are going to have to file two tax retruns each year, one for your individual income and one for the corporation. This means that you are going to end up paying more for your accounting fees. But you are also going to be paying double taxes, because you have to pay personal income tax on the profits that you received plus all of the money made by the corporation is taxed before you receive your share.

Here are the main advantages of having a limited liability company:

1. Limited Liability ? this is similar to a corporation because you have the same protections as the corporation when it comes to being responsible for the business debts. Basically a LLC exists as a separate entity so the members can?t be held responsible unless they have signed a personal guarantee.
2. Flexible Profit Distribution ? this allows you to select varying forms of distribution of profits. A partnership requires you to split the profits fifty-fifty, but with the LLC you can do that or choose from another method, however you see fit.
3. No Minutes ? corporations are required to keep formal minutes, have meetings, and record resolutions. But the LLC business structure does not require you to do any of these things, which in the long run actually makes it easier to operate.
4. Flow Through Taxation ? all of your business losses, profits, and expenses are going to flow through the company to the individual members. So in this type of business you are going to avoid the double taxation of paying corporate tax and individual tax. In most cases this is considered to be a tax advantage but in some cases a business can benefit from having a corporate tax structure.

Here are the disadvantages to having a limited liability company:

1. Limited Life ? unlike a corporation a limited liability company will not last forever. In fact these will be dissolved when one member, just one, dies or declares bankruptcy, regardless of how the other members are doing financially or if they want to stay in business. If they want to continue they must redefine their business as a limited liability.
2. Going Public ? if you have any thoughts about taking yoru business public or issuing shares to your employees in the future you are better off going corporate from the beginning because of the complications of switching later on in the business? life.
3. Added Complexity ? if you are running a sole proprietorship or even a partnership you are going to have an easier time because they are easy to run and do not require much paperwork. But when it comes to a LLC things get quite a bit more complicated. The reason for this is that a LLC can be federally classified as sole proprietorship, partnership or a corporation for tax purposes, which makes things all that more complicated because you have to learn the appropriate tax rules that apply.

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Source: http://themodernaccountant.com/2012/12/29/corporation-or-llc-which-is-right/

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