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Corporation vs LLC

Most anyone who’s started a company has at one time evaluated the differences between a corporation vs llc.

What’s the difference and why do these differences matter…

If there were two different types of initials that commonly followed the name of a business it would be "LLC" and "Inc."

Now, to the common person, there is no difference between these two business classifications.

Granted, while there are a certain number of similarities between the two there are also a number of differences as well.

For many partnerships or sole proprietors, selecting whether or not to form a corporation can lead to somewhat of a quandary: which entity would be most beneficial to form.

The best way to answer this question would be to first understand the differences between the two.

From a clear understanding of the corporation vs LLC discussion, selecting the classification that would best fit a particular business situation becomes possible.

Key Differences: Corporation vs LLC

So what are the main differences between starting an LLC and a forming a corporation? Like a corporation, an LLC provides personal liability and asset protection.

Also, an LLC can provide the ability to conduct business in the name of the LLC as opposed to the individual.

Best of all, an LLC is not subject the taxation of a corporation as an LLC’s taxation rules are similar to those which are applied to individuals and sole proprietorships.

LLC’s also come with a number of structural and organization benefits. Corporations, unlike an LLC, are required to have a board of directors and must establish bylaws for the governance of the corporation.

Those who make up the corporation are called "shareholders" whereas those who make up an LLC are known as members. Within a corporation, the shareholders vote on who will comprise the board of directors.

This, obviously, does not occur with an LLC as an LLC is not mandated to have a board of directors.

Differences in Taxation

Another major difference in a Corporation vs LLC centers on the issue of taxation as an LLC is subject to "pass through" taxation whereas a corporation will be taxed as a business entity. Keep in mind, the earning from an LLC are considered self-employed income.

That means that those who receive income from an LLC are required to pay self employment tax. With a corporation, this is not necessary although a corporation will be required to pay business taxes that an LLC is not required to pay.

It would not be wise, however, to totally dismiss the value of forming a corporate entity. Corporations also have access to a number of benefits that when forming an LLC, you may not be able to offer.

For example, the employees of an LLC are not going to be offered stock option plans or certain retirement benefits.

While this may not seem like much on the surface, employee retention – particularly the retention of good employees – is critical to a company’s success. So, it may not be in the best interest to remain an LLC when employees are jumping to the "greener pastures" offered by a corporation.

Honestly, the differences between a corporation vs LLC are mostly structural and tax related. One is not better than the other per se. Rather one is better than the other based on individual circumstance and business plans.

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