Choosing a structure for a new business can help provide you with personal protection, tax benefits, and a more promising future. Two options for your business structure include a Limited Liability Company (LLC) and a corporation. While there are many benefits of each business type, there may be one option that can benefit you more. Here are the benefits and disadvantages of each type and how to set them up for your industry.
Advantages Of An LLC
LLCs are a business structure that provides more personal liability protections and some benefits of partnerships. An LLC is owned by one or more members and there is no maximum number. Establishing your business as an LLC gives you a flexible hybrid structure where your personal assets are protected from business debts.
The biggest advantage of establishing this business structure is avoiding double taxation. Pass-through taxation allows a business owner to be taxed on their profits through their personal return. There are different flexible tax options when it comes to LLCs.
Additional benefits of making your business an LLC are:
- Flexible ownership
- The ability for owners to appoint managers
- Simpler to run
- Inexpensive to form
- Adds credibility to your business
- Privacy of ownership structure
- Best for individuals
Disadvantages Of An LLC
There will always be drawbacks to every option. Even if someone raves about a certain business structure, those advantages may not appeal to you. For example, LLCs are more flexible and easy to run, but if you like structure and rules, it may not be right for you.
In the future of your business, it may be difficult to transfer ownership of the business when registered as an LLC. These structures are also subject to state laws, which could impact the cost and processes your business must follow.
Advantages Of A Corporation
A corporation is a more formal business structure as it is legally separate from its owners. This protects them from being liable for unplanned circumstances in the business and provides more opportunities to raise capital.
Raising capital is possible with a corporation because it allows the business to sell stock to the public. Because the individual is not subject to debts of the business, they may feel more comfortable taking a risk to sell and trade stocks.
There are also two options to choose from inside the corporation structure. C-corporation is a separate legal entity from its owners and S-corporations have up to 100 shareholders that function as a partnership.
Additional advantages of corporations include:
- Limited personal risk and liability
- Easier transferability of ownership
- Higher credibility than other business
- Existing after the owners pass away
- Stock holding opportunities for employees
Disadvantages Of A Corporation
One major disadvantage is that corporations are taxed by federal and state tax laws. Shareholders are also required to disclose the dividends of the business on their personal taxes. You will essentially be double-taxed when setting up your business structure as a corporation.
There are two divisions in a corporation, which could make it easier for large companies to split up the liability. S-corporations are seen as co-existing with their physical owners, which means that shareholders could be responsible for the debts of other owners.
Finally, corporations are some of the most strict business structures. Corporations are required to hold annual meetings, keep more records and reports, and follow local and federal tax laws. If you don’t mind structure and record keeping, these may not feel like a disadvantage.
Which Is More Expensive To Set Up?
When first setting up a business, there are many expenses that need to be taken care of upfront. Setting up a business with the right structure could save you from financial stress at the beginning of your business. Corporations are the most expensive business structure to set up.
Because of the intense registration process and complexity of corporations, many owners will hire legal help to ensure the business is set up for success. Business lawyers will help navigate the contracts and filings that come with setting up either a C-corp or an S-corp.
Corps also need to have voting and meetings to elect directors. This can get expensive and time-consuming which limits productivity. It is more expensive to form a full business structure because of voting and hiring higher-value directors.
Should I Consult A Lawyer To Set Up My Business
While it is not always required to have a lawyer involved in the setup of a business, they provide benefits you can not get otherwise. Lawyers help minimize risks that come from improperly developed businesses. Business lawsuits come when employees feel they are not receiving fair treatment or when the company doesn’t provide services. A legal team can help predict these issues and put systems in place to prevent court proceedings.
Lawyers can also help draft articles of incorporation, obtain employers’ identification numbers, create bylaws, and select directors which are all needed to set up a business. Whether you are choosing an LLC or a corporation, these tasks need to be done before you can enter the business world.
The biggest reason to hire a lawyer is to save you time. Having a lawyer work on these structuring and paper tasks gives you more freedom to meet with employees, and potential clients, greet customers, or perfect your processes.