Navigating the business world can be challenging enough as a new or advancing business owner without the added stress of the legal world. That is why Mattia Law is here to help you with all of your business needs, including establishing a corporation or LLC. One of the biggest questions faced when starting your business is: corporation or LLC? This is a very important question to ensure the structure of your business, which can affect how much you pay in taxes, your personal liability, the paperwork that needs to be filed, and your ability to raise money for your business.
Both corporations and LLCs are limited liability entities, which means that the “owners” themselves are not personally liable for business debts. Unlike LLCs, corporations pay income tax on their profits. This means that corporate profits may be taxed twice; once when the profit is made and a second time when the dividends are paid to stockholders.
So, what is a corporation?
A corporation, sometimes called a C corp, is a business that is owned by shareholders, which is a person who owns shares in a company. The corporation distributes shares to shareholders. Therefore, each shareholder owns the number of shares that corresponds to his/her ownership. For example, if there are 100 shares and a shareholder owns half of the business, they own 50 shares. This is an ideal business model for business owners planning to seek outside investors. A c corp is taxed as a separate entity. There are no restrictions on the amount of shareholders.
Contrary to C corps, S corps allow profits, and some losses, to be passed through directly to owners’ personal income without ever being subject to corporate tax rates. In order for a corporation to qualify as an S corp, it must meet certain criteria which is laid out here on the IRS website. The criteria includes a limit on the number of shareholders, which must all be U.S. citizens.
What is an LLC?
LLC stands for Limited Liability Company. An LLC is similar to a corporation but it is more flexible in terms of management and taxation. An LLC can be owned by one person or many people. Members of an LLC must pay self-employment tax, but self-employment tax rates are lower than tax rates involved in a corporation. For this reason, LLCs are favored by smaller, owner-managed businesses because there is less corporate formality.
The best way to figure out whether a corporation of an LLC is the better business model is to assess the needs and goals of our business. Regardless, Mattia Law can help you navigate the legality of the business world. Contact our office today!