When starting a new company, you have several viable options for making it legal. However, the two most common include an LLC and incorporation. The two share similarities, such as filing the appropriate paperwork with the state. Also, both an LLC and incorporation serve to protect you from liability should you get sued or when facing financial challenges. However, there are also differences that you need to understand.
Management Structure and Profit-Sharing
An LLC has no specific management structure, making it a less formal organization. In this case, an owner or a group of managers can manage the company. In fact, people involved do not require a job title such as CEO, CFO, CIO, etc. With this arrangement, each member owns a percentage of interest, although profits often get distributed in whatever way everyone agrees to.
An incorporation has a more precise management structure. As an example, an incorporated company has a board of directors responsible for overseeing the overall business operations. It also has officers with official job titles, each of which are involved with a specific area of the company. For instance, the CFO is responsible for the financial department whereas the CIO oversees information technology. There are also annual meetings for shareholders to discuss the company and receive profits according to the type and number of shares owned.
The taxes are something else to consider when deciding between an LLC and incorporation for your new company. An LLC has no tax classification, meaning that just one member pays the taxes as a sole operatorship. However, if you have multiple members, each person pays taxes as though they are partners. As for income and expenses, these get reported as personal income with members paying taxes on their share of the profits. If you meet the criteria, you can get taxed as either a C or S corporation.
For an incorporated company, taxes get paid differently based on either a C or S corporation. With a C corporation, corporate taxes get paid on profits. For paid dividends, shareholders pay personal income tax. The disadvantage is that C corporations get taxed twice. As for an S corporation, there are no corporate taxes. Instead, they get paid on the profits paid to shareholders, who in turn pay personal income tax. While this “pass” system saves money, it is not an option for all incorporated companies.
Even recordkeeping requirements differ between an LLC and incorporation. As expected, there are fewer demands on an LLC in most states. For one thing, an LLC does not hold annual shareholder meetings, but also, you would deal with less paperwork. On the other hand, an incorporated company does have yearly meetings and a significant amount of paperwork that makes excellent recordkeeping critical.
The Bottom Line
As you can see, there are a lot of decisions to make when forming a new company. To avoid confusion or making the wrong choice between an LLC and incorporation, you should always seek the legal services of an attorney who specializes in this area of the law.