How to choose between an LLC and a corporation
HOW TO CHOOSE BETWEEN AN LLC (LIMITED LIABILITY COMPANY) AND A CORPORATION
An LLC is a Limited Liability Company and is not incorporated. It is formed by filing articles of organization with a State of your choice. A Corporation is a traditional form of a company structure. It is incorporated by filing articles of incorporation with a State of your choice.
A lot of people have heard they will save taxes by incorporating. They come to us saying they want an S corp. The S corp. is an election you make with the IRS, and can be made with an LLC or a corporation. If you have a decent amount of revenue and profit flowing through your company, declaring your company an S corp will save you about 15% of your taxes at the end of the year. We will explain the S corp. election down farther in this form.
If you’re choosing between an LLC and a corporation, most people will do an LLC. You won’t have the strict need for annual meetings and other formalities that bog down your time with a corporation.
S corp. with the IRS at a later date. The easiest time to make this election is at the end of the year, for the next calendar year. If you have more than one owner, the LLC will be taxed as a partnership, and you’ll split the net income of the company between the two owners (Members) according to how your ownership of the company is split.
LLC’s have members that hold a membership interest. Members are the owners. LLC’s are managed by managers. Managers do not have to be a member, but can be a member as well. Usually, in the LLC internal operating agreement, you’ll state that the members are managers, thus kind of making the whole thing of member managed vs. manager managed a goofy technicality. LLC’s should have operating agreements, but aren’t required to. Some people will argue that the operating agreement is the most important document if you go to court. I agree with this to a certain point. If you are owning the company with someone else…besides your spouse…you definitely need to have an operating agreement spelling out who gets what if you get in a fight and don’t like each other anymore. This is when an operating agreement comes into play in court. I have yet to have seen a court case where the corporate veil was pierced strictly on the point of someone not having an operating agreement. In fact, a lot of states have specific language in the Statutes governing business entities protecting people by saying things like: “Failure to keep an operating agreement, and/or follow the guidelines or rules of corporate meetings, and annual meetings is not grounds to gain access to the owners of a company.”
If you don’t plan on having an operating agreement, we will list your company as member managed.
Corporations: Corporations have shareholders, officers, and directors. None of which has to be connected at all. The directors are the people who control the company, but the shareholders are the people who vote the directors into office. The shareholders can hold a vote at anytime to get rid off or change the directors of the corporation.