If you have decided to structure your small business to allow owners to avoid personal liability, a limited liability company (LLC) or a corporation may be right for you. While they have several similarities, LLCs and corporations also hold drastic differences that should be considered carefully before making your decision. Many small business owners appreciate the streamlined LLC. Under an LLC, owners need only an informal operating agreement. Corporation owners on the other hand, must file annual reports, create a board of directors, and hold shareholder meetings.
Another attractive element of LLCs is pass-through taxation. Simply put, the LLC is not taxed as an entity; rather, the business’ taxes are passed through to the owners. Corporations face double taxation, with the entity itself being taxed as well as its shareholders. If you plan to have your business own property, which will likely grow in value, you may want to lean toward structuring your entity as an LLC to avoid double taxes on real estate and any other profits you earn. An LLC also allows owners to divide up profits unevenly. So, if you do 75 percent of the work and your business partner does 25 percent, you can divide profits along those lines. Corporation owners don’t have the same flexibility.
While for some, the LLC may make the most sense at first glance, choosing a corporation can have several benefits for business owners as well. For example, if you plan to have individuals invest in your business, the structure a corporation brings can be valuable. LLCs work well for simpler, smaller businesses with fewer owners, but may not offer enough tangible ownership when the number of individuals involved grows. In addition, only corporation owners can issue stocks—something to consider when thinking of retaining shareholders and offering incentives to employees. Corporations also allow owners to offer health benefits to individuals who are both investors and employees of the company.
Corporation owners can deduct the full cost of health insurance from its profits, whereas LLCs only allow owners to deduct a fraction of that cost. While understanding the distinctions between an LLC and a corporation can help when deciding how to structure your business, there may not be a clear-cut answer for your company. As a highly knowledgeable Houston business law attorney, I have extensive experience in helping business owners choose the right business structure for their short- and long-term goals. If you would like to talk further about how to set your business up for success, contact Patricia M. Davis, Attorney at Law to schedule an initial consultation.