Corporation vs LLC

John was a talented businessman and owner of a proprietary firm. He had the ability to sense an opportunity, take some risks (calculated of course!) and add profits to his business. It was almost 11 years that he was successfully running his firm. But, he always thought big and wanted to expand his business and also perform in the growing business competition. He therefore started thinking of incorporating his business against other renowned players in the market; at the same time he was also aware that incorporating a business is not an easy thing. On the other side he was thinking of converting his firm into a limited liability company, but again that too came with some disadvantages. In short, he was in a dilemma of corporation and LLC. But one thing was clear to him that, whatever the case may be, he wanted to play a 'safe game' for his business. He therefore went on to do research for both these entities of business and found out some advantages and disadvantages of corporation vs LLC. Lets find out what were these...

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. Read on....

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 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.
• Fund Raising- 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. But 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- Corporation is not a small deal, it involves many legal formalities, corporation laws, agreement documents, etc. It is necessary to preserve all these documents 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 as you were in sole proprietorship.

LLC-Limited Liability Company

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 as 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 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 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.
• Flexibility- 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 than 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 differs 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 helped John to have a clear picture of corporation vs LLC. He therefore thought over it and finally took a sensible decision that favored his business growth strategies. He incorporated his business against a big player to stand out in the business competition. I suppose this information will prove helpful to you as well. After all, everyone wants to make the best choice for his business.