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Corporation Vs. LLC

Ujwal Deshmukh
Here, we have discussed the advantages and disadvantages of a corporation and LLC, to help you make a choice for a business entity matching your business type.
For a start-up entrepreneur, or would-be small-business owner, besides prioritizing profit, must also decide how the business should be structured. The popular or oft-chosen options are sole proprietor, partnership and incorporation (which includes S-corporation), not necessarily in order.
Choosing the right option is not only beneficial for the business in question but can also have certain tax implications for the owner of that business. Here we have profiled two of the available options, but consulting an accountant or tax adviser before choosing your business structure will prove to be of immeasurable help.

What is a Corporation

A corporation is defined as a legal entity which is independent of the legal entities of its owners, shareholders, or the management personnel running it. Incorporation of any business requires one to undergo a lot of legal formalities set up by the Government of the United States. There are many advantages and disadvantages associated with a corporation.

Advantages of a Corporation

Limited Liability- Owners of the corporation enjoy limited liability and they are not completely responsible for the profits and losses of the corporation. Their scope of liability remains confined to their investment in the venture.

Business Expansion- It is possible and becomes easy to expand your business when you incorporate it with some organization.
Confidentiality of Business Affairs- Another advantage of a corporation over other business entities is that your business transactions remain confidential. Also, if you want to continue your business but do not wish to expose your name, you can do it by incorporating your business.
Fundraising- As a corporation, it becomes quite easy to generate funds for business development. This is because there are many people, including shareholders, who invest in the corporation.
Existence Forever- Moreover, the corporation will never stop working or will never end unless in circumstances such as complete closures with the consent of all the concerned authorities. Its existence would not get affected due to the death, resignation or withdrawal of funds of any of the owners, shareholders, or the directors.
Reliability- Finally, the corporation is the most reliable form of business entity and therefore it is more preferred and trusted by people.

Disadvantages of a Corporation

Limited Liability Not Always Guaranteed- Even if you form a corporation, it is not necessary that you are always able to enjoy limited liability. Sometimes, you will have to keep your private assets as a guarantee for the repayment of funds to the financial institution, if it does not find you eligible for payment of money.
Enormous Record Handling- A corporation is not a small deal, it involves many legal formalities, agreement documents, etc. It is necessary to preserve all these documents very carefully.

Expensive Set Up- Moreover, setting up a corporation is an expensive task, taking into account the number of formalities you need to complete while setting it up.
Tax Payment- Now, as a part of the corporation, you will be taxable for your self income as well as for the corporation's revenue.

Prohibition of Personal Tax Credits
- As a corporation, you are eligible for personal tax credits, just as you were in a sole proprietorship.

What is a Limited Liability Company (LLC)

LLC or a limited liability company is a comparatively new type of business entity. It is also a legal business entity which is characterized by limited liability to its owners. In modern business parlance, it is called a hybrid business entity exhibiting the features of a corporation, sole proprietary firm, as well as a business partnership.

Advantages of an LLC

Limited Liability- This is a feature that is shared by a corporation as well as an LLC. But here, the advantage is that the owners of the LLC are protected for their personal liabilities as well.
Less Legal Formalities- Reduced legal formalities are always a sigh of relief for business owners. In an LLC, it is not necessary for the owners to cope up with the requirements or to complete the legal formalities involved while setting up a corporation.
Single Ownership- Unlike in a corporation, you can set up an LLC by remaining the sole owner of your company.

Tax Payments
- As the owner of an LLC, you are taxable only for personal income and not for the income of your LLC. Therefore, you need not pay double income tax.
Long Existence- The LLC will exist forever, irrespective of the owner's death or retirement.

- The LLC with the 'check-the-box' can enjoy the benefits of being taxed as a sole proprietorship, corporation, or an LLC itself.

Disadvantages of an LLC

Expensive Business Entity- Though setting up an LLC is less expensive and hectic as compared to setting up a corporation, the cost incurred in setting up an LLC is definitely more than that of a sole proprietary firm or a partnership firm.
Tax on Appreciated Assets- If you convert a partnership firm or your sole proprietary firm into an LLC, you could be taxable on your appreciated assets.

Uneven Treatment to the Business- If your LLC exists in multiple states, it becomes difficult to handle, as the nature of rules and regulations differ from state to state.
Termination of LLC- According to the Federal Income Tax, any LLC is a partnership. Therefore, if half of the profit interest and capital or even more than that is exchanged or sold within a year, then the LLC would get terminated for some of the Federal tax reasons.
This information will help you get a clearer picture of a corporation vs. LLC. Then spare some thought over it, and finally take a decision that favors your business growth strategies. You can then incorporate your business against a big player to stand out in the business competition.