Creating A Business: LLC Vs. Corporation

When it comes to creating a business from the ground up, the list of decisions that you will have to make can seem overwhelming. One of the biggest decisions you can make starting out is to decide if your business will be an LLC or a corporation. In today’s post, we will break down the pros and cons of each and help you decide if your business should form as an LLC or a corporation.

Don’t worry; we will keep this simple! Let’s get started:

Do I Have To Choose A Business Entity?
What Is The Difference Between An LLC & Corporation?
What Is An LLC?
Forming an LLC
What’s A Corporation?
Forming a Corporation
The Types of Corporations
What are the Pros & Cons of LLCs?
What are the Pros and Cons of Corporations?

Do I Have To Choose A Business Entity?

Choosing to be an LLC or a corporation comes with certain perks and brings protections when it comes to business debts (such as being able to separate your personal finances from the debts of your company). But with that being said, you can create a business without your company falling under the label of a formal business entity.

That means:

If you’re flying solo, you’ll hold the position of a sole proprietor. If you’re working with business partners, you’ll be part of a general partnership. You can always form a formal business entity later on once your business concept takes off.

But risks can arise:

Risks of running a business without a forming a business entity: You'll be liable for debts, lack of structure, and your business will have a harder time acquiring funding from banks and investors.

What Is The Difference Between An LLC and a Corporation?

A lot of people often wonder what the differences between an LLC or a corporation are or if it even matters which route you choose. Let’s dissect each one.

What Is An LLC?

An LLC stands for Limited Liability Company. LLC owners are known as “members” and every member owns a percentage of the company. When it comes down to management, the majority of LLC’s are managed by their members, but they can also be run by a group of managers. This is mainly done when there are members that are completely hands-off in decision making and day to day operations.

Forming an LLC

When it comes to forming an LLC, you and the other members (if there are any) will file what is called the Articles of Organization.

An Article of Organization is a document filed with the secretary of state laying out the concept of business and basic details of your company. After filing the Articles of Organization, you will then put together what is known as an Operating Agreement. This agreement is used to manage the day to day operations and holds each member accountable to their respective duties.

What is a Corporation?

Corporations, also known as C Corporations, are legal entities that provide the highest amount of protection to business owners. This type of business formation is great for medium to high-risk business ventures.

Forming a Corporation

The creation of your corporation will begin with filing the Articles of Incorporation (a government document simply stating the existence of your corporation) in the state in which your corporation resides. You will then create a Board of Directors to monitor your corporation from the top down. In addition to overseeing your corporation, your Board of Directors will also set your company’s bylaws.

The Types of Corporations

S Corporations

S Corporations allow your corporation to function as a C Corporation but maintain the tax benefits of an LLC.

B Corporations

B Corporations are perfect for a business that wants to put an equal amount of focus on society, the environment, and their profits. This type of corporation is unique due to the fact that other forms of corporations can be taken to court by their investors if profits are not put before all else.

What are the Pros & Cons of LLCs?

Pros:

Members are not personally liable for the actions of their company.
Your and your members can self-manage or choose to hire managers.
The price can vary depending on the state, but the cost is typically low and so is the upkeep.

Cons:

Unless your company agrees to be taxed as a corporation, you and your employees will be taxed as self-employed.
If a member leaves, dies, and/or goes bankrupt, the LLC must dissolve and a new LLC will need to be formed.

What Are The Pros & Cons of Corporations?

Pros:

You as a business owner have limited liability when it comes to your business debt.
The ability to sell stock will help entice potential investors.
Corporations are able to attract potential hires by giving them the option to buy company stock.

Cons:

The profits made by the corporation and the earned profits of the stockholders are taxed.
You will be required to go to meetings and maintain appropriate records to prove that your company is operating as a separate entity from the owner.

Don’t Wait Let Us Help

At Davis Business Law it doesn’t matter if you choose an LLC or a corporation; our business attorneys can help you get your business running. We have the track record and the passion to provide you with the best legal services your business needs. To get started or to learn more you can contact us online! Let us worry about the what-ifs so that you can focus on what matters: your business.