Now that you have chosen the name of your new business you are ready to introduce it to the world. As part of your business start-up check list you made the decision that you want to change from being a only proprietor into an incorporated entity. However, you are not sure if you want to form a Limited Liability Company or a Corporation.
This is one of the biggest decisions that you can make as a business owner and one that will position your company for success. A few things to think about when making this decision are:
· Tax benefits
· Amount of paperwork that you want to deal with on an annual basis
· Personal liability
· How you wish to raise capital
in spite of of the kind of corporate entity you choose it is important to understand that the decision to form an established business entity has many benefits:
Asset Protection – The foremost advantage to either forming a corporation or LLC is asset protection. Once you create a business entity for your business your personal assets are separated from your business assets and you are no longer co-mingling them together. What this method is that if there is ever any litigation and you find yourself in court being sued in most situations your personal assets are protected this includes your home, car, and personal bank accounts.
Name Protection – Incorporating your business is a crucial step in branding. But name protection is also a assistance to incorporating a business. When your business becomes incorporated the business name is protected at the state level.
Credibility – When you present your business to prospective customers, vendors, business partners, and possible investors it is important that you are viewed as credible. This is especially important as you seek funding for your business. Credibility is important as you pursue business loans, grants, and other forms of financing. Establishing a legal business structure for your business will bring credibility to your company.
Tax Benefits – Whether you choose to form a corporation or an LLC there will be tax benefits afforded to you that you did not receive as a only proprietor. However, it is important to consult with a tax specialized to comprehend the tax implications of both types of business entities.
Forming an LLC
The simplest form of business entity is an LLC. An LLC provides you with the protection of a corporation while affording you with the pass by taxation of a only proprietorship or partnership of two or more individuals. Additionally, an LLC can also choose to be taxed as a corporation.
An LLC is produced by filing either Articles of Organization or a Certificate of Formation with the Secretary of State in the state you choose to form it in and pay the appropriate fees.
An LLC is popular in a lot of scenarios because while it provides protection it is not as formal as a corporation in the respect that there are no formal annual meeting requirements. Under this kind of entity, the members who are the owners are required to create an operating agreement which outlines the management of the company.
Corporation-the formal business entity
A corporation differs from an LLC because it is a more formal kind of business entity. A corporation is produced by filing either Articles of Incorporation or a Certificate of Incorporation with the Secretary of State within the state you choose to form it in and pay the appropriate fees.
A corporation is governed by a board of directors who appoint the officers who are responsible for managing the company. The corporate ownership is determined by shareholders who own shares of stock. Shares of stock can be sold to raise capital for the corporation.
A corporation is a more formal kind of business structure because of its requirement to have an annual meeting which must be proven in the formal minutes. Additionally, bylaws must be adopted and maintained. If the corporation neglects to perform its annual requirements the corporate veil can be pierced which method that the corporation is at risk for losing its protection.
Now that the basic differences between forming a corporation or an LLC have been outlined, you can make an informed decision. Congratulations as you move forward in your business ownership journey.