Once you have the idea for your startup and are ready to hit the road running, the next step will be registering the business. This causes a lot of challenges for entrepreneurs because there are several choices. But choosing between an LLC or a corporation is usually one of the most challenging decisions you can make an entrepreneur.
While both options give you limited liability, separating your personal belongings from the business, they differ in various ways, from the management to the ownership. It is best to know what each entails to ensure you choose wisely.
Difference Between an LLC and a Corporation
LLCs, also Limited Liability Company, allow the owners to pass the profits and losses to their personal tax accounts while still enjoying the limited liability corporations have. But it also means you cannot accumulate profits for an LLC like you would in a corporation.
On the other hand, a corporation is an entity on its own, meaning it pays its own taxes and all its legal frameworks and structures are separate from you as the founder. The corporation’s profits will either be retained in the business or paid to the owner and other shareholders in the form of dividends.
Which is better? What to Consider?
To decide which is the best option for your startup, it is best to dig deeper into the features that differentiate these two entities.
For an LLC, if there is more than one founder, the organization will require an operating agreement that states each founder’s roles and how much they will share from the profits. In the agreement, you can also include other details regarding the transfer of one’s own share when leaving the organization for better flexibility in its management and running.
Corporations sell shares to individuals, who then become the owners, also referred to as shareholders. Shareholders can sell or transfer their stake to other individuals or buy more stock are increase their ownership in the company. The more shares one, the more they benefit when the company makes profits and distributes it as dividends.
Also, corporations are a going concern, meaning they exist in perpetuity. Regardless of what happens to the founders, the business will continue since it is a separate entity from the owners.
As mentioned earlier, LLCs allow their owners to pass the profits to their personal accounts and pay taxes from there. That means your LLC startup’s profits and losses will be declared under your personal income taxes rather than the company’s name.
Since corporations are separate entities from their owners with its own legal identity and framework, it pays all its taxes on profits and any distributed dividends to the shareholders.
The management of both entities is also quite different. Where the LLC features a flexible management system, a corporation has a rigid structure with more bureaucracies. An LLC’s management can be single-member, member-managed, or manager-managed. A single-member-managed LLC is where only one person runs the business, especially where you are the business’s sole founder and investor.
Member-managed LLC is where multiple members run the business with similar responsibilities. Manager-managed LLCs have a board of managers who oversee the business’s running and is ideal where you and other founding members do not want to run the business by yourselves.
On the other hand, corporations must have a board of directors who hold the responsibility of the business’s management, including making decisions on the company’s direction and other important decisions. The company’s daily operations are then run by other employees, like finance, sales, marketing, and procurement officers, who report to the board or specific department managers under the management board.
For legal and tax purposes, it is best to choose the right entity structure for your startup. If you are looking for more control in the business and passing the business profits and losses to your individual tax, an LLC would be the best option. But if you want the company separate and on its own, with its own identity legally and tax-wise, a corporation would be best. With the corporation, the business will also continue in perpetuity, regardless of what happens to you.