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LLC vs. INCORPORATION:
Is One Better Than the Other for Your Business?

Both the Limited Liability Company (better known as an LLC) and the Corporation offer their owners similar protections and advantages. Both provide owners with protection from legal and financial liability. Many view the LLC as a more flexible business structure, while others view the structured nature of a corporation as a benefit.

Below is a brief description of just some of the possible benefits of each business structure:



Limited Liability Company

A limited liability company (called an "LLC") is a legal entity that, in the eyes of the law, exists separate and apart from its owners. The owners of the LLC are called "members" (as compared to a corporation, where the owners are referred to as "shareholders"). An LLC is formed by filing with the proper state governmental authority (usually the Secretary of State) articles of organization (or the equivalent under the laws of a particular state) and all filing fees are paid. Some state laws may impose additional pre or post-creation requirements as well.


There are three primary areas of an LLC that are attractive business owners:

* The LLC, like a partnership, is given a pass through tax treatment, i.e. profits and losses are reported on each owner/member's individual tax return;

* The LLC, like a corporation, provides liability protection for the members (assuming that potential debts and obligations are incurred in the name of the LLC and not the members individually), which means that creditors can assert their claims only against LLC and not directly against the members (again, assuming that the LLC is properly operated and the members do not personally guarantee any obligation of the LLC); and

* The LLC provides flexibility in management (as compared to the relatively rigid corporate structure) and other issues while preserving the 2 advantages listed above.



Corporations

A for-profit corporation is a business structure formed by filing articles or incorporation (or similarly named documents) with the appropriate state agency (again, usually the secretary of state). A corporation is recognized as being separate and apart from its owners. (The owners are called "shareholders".) As a separate entity, it has its own rights, privileges, and liabilities apart from the individuals who form it.

The shareholders of a corporation are generally not personally liable or responsible for the debts or obligations of the corporation. A stockholder's personal liability is usually limited to the amount of his, her or its investment in the corporation and no more. A corporation continues to exist after the death of or transfer of shares by one or more of the shareholders. A corporation pays taxes on its profits, and its shareholders pay taxes on dividends, unless "S" tax status is elected - then the profits and losses of the corporation "pass through" to the shareholders.


Advantages of Corporation

* With the shield against personal liability, the shareholders of a corporation have only the money that they have invested into the company at risk - shareholders are generally not required to pay their own money to satisfy any debt of or judgment against the company.

* Many view the corporate structure as being permanent, adding "instant" credibility and stature to a business.

* A corporation can be the most enduring legal business structure. If a sole proprietor or partner dies, the business ends or it may become involved in various legal entanglements. A corporation's existence may continue on regardless of what may happen to its individual officers, directors or shareholders. Also, ownership of the business may be transferred, without disrupting operations, through the sale of stock.

* Capital can be more easily raised with a corporation. This may be accomplished through the sale of stock or other equity interests.

* Corporations can offer anonymity to its owners. The corporate name is used in the operation of the business, generally not that of the shareholders.

* Tax Advantages - Deductible Employee Benefits. Corporations may offer the advantage of providing tax-deductible benefits such as the cost of health and life insurance, travel and entertainment as well as providing an increased tax shelter for retirement plans.


ALSO: Compare LLC vs. Incorporation vs. Partnership vs. Sole Proprietorship

 


Learn More Want to learn more about corporate structures?
See our Q & A series on each type at 'Ask Standard Legal' >


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See Standard Legal's Do-It-Yourself Legal Forms Software here >



DISCLAIMER REGARDING LEGAL ADVICE: None of information contained on this web site is intended to constitute legal or other professional advice, and you should not rely solely on the information contained on the site for making legal decisions. When necessary, you should consult with an attorney for specific advice tailored to your situation.




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