Corporations vs. LLCs
How do you know whether a corporation or LLC is right for your business?
Let's assume that you've concluded it would be advantageous to operate your small business through an entity that limits the personal liability of all the owners -- even if following this strategy involves a bit more paperwork, complexity and possible expense. You have two main choices -- either the tried and true corporation or the new and streamlined limited liability company (LLC). Which is better? There's no answer to this question that applies to every business. Nevertheless, some general principles may be helpful.
When an LLC May Make Sense
For the majority of small businesses, the relative simplicity and flexibility of the LLC makes it the better choice. This is especially true if your business will hold property, such as real estate, that's likely to increase in value. That's because regular corporations (sometimes called C corporations) and their shareholders are subject to a double tax (both the corporation and the shareholders are taxed) on the increased value of the property when the property is sold or the corporation is liquidated. By contrast, LLC owners (called members) avoid this double taxation because the business's tax liabilities are passed through to them; the LLC itself does not pay a tax on its income.
When a Corporation May Make Sense
An LLC isn't always the best choice, however. Occasionally, other factors will be present that may tip the balance toward a corporation. Such factors include the following:
- You expect to have multiple investors in your business or to raise money from the public. While an LLC works fine when you have just a few investors -- especially those who will be active in the day-to-day operations of the business -- it may get more awkward when the number of investors increases. For example, you'll likely run into resistance from potential investors if you can't offer them the corporate stock certificates that they consider tangible evidence of their partial ownership of the business. Rather than wasting your time trying to overcome this resistance, it's probably better to structure your business as a corporation.
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