If you're thinking about starting a business venture, you may be wondering whether to form an LLC or to incorporate. While the two may seem interchangeable at times, there are some distinct differences between the two. Let's talk a bit about what an LLC is and what a corporate structure entails.
What is an LLC?
LLC stands for Limited Liability Company. It is not a corporate entity and is taxed like a sole proprietorship in its default form. However, it does provide protection for a business owner against having personal assets taken away to cover for anything that happens to the business.
What Is a Corporation?
A corporation is a formal business entity that must be formed by filing incorporation documents in the state where the company is being founded. It must have officers, a shareholder meeting each year, and keep minutes of that meeting. Corporations may have retained earnings and pay dividends to shareholders.
“Check the Box” Gives LLC Owners Flexibility
People may confuse the LLC structure with the corporate structure because the LLC owner can choose to be taxed in a variety of ways. He or she can "check the box" and be taxed as an s-corporation, c-corporation, or a partnership. However, the owner of the LLC is not required to have shareholders or a formal meeting. All he or she needs to do is fill out the same tax forms that a corporation would. Forming an LLC that is taxed like a corporation is often cheaper and easier for owners who are looking to keep costs low and financial flexibility high.
Incorporating May Give a Business More Credibility
Whether the business decides to form as an LLC or as a corporation, it may be able to attract customers easier than a sole proprietor could. This is because many people assume that someone who goes through the trouble to incorporate have long-term plans to stay in business. Also, there may be more public information available for a corporation as opposed to a sole proprietor.
The differences between an LLC and a corporation are subtle in many cases. However, it is good to know that the LLC structure is just a way for sole proprietors or partnerships to have added liability protection while still being taxed the same. Those who are savvy will "check the box" and take advantage of an easy way to get better tax treatment as the needs of the business change.
