If you are about to establish a business, then you must decide whether you want to establish an LLC or a corporation. Your selected business entity will then establish grounds for your business’s ability to scale as well as tax efficiencies and business decisions.
This aspect indicates that you want to carefully examine the available options and analyze how the different business entities affect the entire business framework. The proper selection will help you decrease the potential exposure to liabilities and also help you save taxes.
Read on to learn more.
LLC vs. S Corp – An Overview
You should know that LC stands for Limited Liability Company, which basically means that you are not held liable personally for any potential damages done to the business. Suppose, a few years later, down the road, after establishing your business, someone sues your business. In this case, instead of having them go after your personal house or any other assets, they can only go after your business assets, which perfectly illustrates why LLCs are quite popular as compared to sole proprietorships.
On the other hand, S Corp stands for business corporation. The first thing you should know about S Corp is that it is a tax designation granted by the IRS. This aspect indicates that you don’t register a corporation like you would an LLC. Instead, you would be telling the IRS that you would like to be taxed like an S Corporation.
What Are the Similarities?
Now, there are several similarities between the LLC and the S Corp. For instance, they both share the following aspects:
- Limited liability protection of personal assets
- Ability to form partnerships
Both are pass-through entities, which means that the businesses themselves don’t pay income taxes. As a matter of fact, the business profits are passed to the owners, and the owners pay the applicable taxes.
How Does The Business Entity Affect Business Decisions
Now that you know the basic difference between an LLC and a Corp, you should know that your chosen business entity will essentially guide your business decisions in terms of finances and liabilities. The decided business entity will also help you formalize your business in a way that prevents the chances of developing misunderstandings between the participants. Essentially, what you will do is define ownership with the selection of the appropriate business entity, which will further help with assigning roles and duties within the business organization.
What Information is Legally Required for Forming A Business Entity
When it comes to forming an LLC or Business Corporation, there can be situations where you will need to hire an attorney. However, you might not need to hire an attorney altogether. Mostly, when one decides to form a business, they either form an LLC or a corporation. There are loads of other businesses and entities that can be formed – but LLC and Corp are the two main types of entities.
Information Required for LLC
At the time of forming an LLC, you will have to file several organizational articles. Along with the articles, you need to include in the document the following information:
- Name of the incorporator
- Address of the resident agent
- Principal office of the company
- The purpose statement
It is important to mention here that the legal requirements for the formation of an LLC are different in all states, which is why you must consult an LLC formation lawyer in your respective or the state where you are forming a business company. Suppose you are establishing a business in the state of Texas, in which case, you must consult the Texas LLC Formation Attorney about the articles of organization that you need to file for a successful formation of the LLC.
Information Required for Corporation
Now, with a corporation, you have to provide quite similar information – but in addition – there is more information that you must provide in the articles of incorporation that are filed with the state. On that note, along with what you have to include in an LLC article of organization, you need to, in the case of the articles of incorporation for a specific corporation, include the following information:
- Name of the initial director
- Information about the stock, such as the number of shares
- The par value of the shares
- Indicate whether or not you want the company to be a closed corporation
Seeking Legal Counsel is Mandatory
You might have already gotten the idea that you have a lot more to do with a Corporation than with an LLC. This aspect perfectly illustrates the importance of talking to a lawyer at the time of deciding whether or not you want to form a closed corporation, how many shares you want the company to be authorized to issue, and who the initial director might or might not be.
There are ways to keep some of that information more private rather than having that information available to the public. This instance is also usually the best time for your lawyer to provide you with useful insights and help you with the entire process of forming a company.
How Does the Business Entity Affect Tax Liabilities
The attorney will also help you make the right decision in terms of protecting your personal assets and minimizing the business’s tax liabilities. It all comes down to your decision of the business entity that you want to form, as you ideally want to protect your personal assets and maximize the tax benefits of your business.
Getting in touch with an attorney is crucial as they can form the best tax strategies for you and ensure that your business setup is well-aligned with the law of your respective state. Thus, the attorney can also help you convert your income into long-term capital gains.
You get the point; consulting a lawyer is absolutely mandatory before you decide on the business entity. Simultaneously, you must choose an entity that is potentially attractive to lenders and investors. The type of business entity you choose can definitely set you up for long-term success.
Final Thoughts
Before you start with the paperwork of getting your business registered, it is in your best interest to get an attorney onboard. The legal expert will assess the specific needs of your business and explain the tax and legal implications of your business according to the state’s law. This way, you will be able to make rather informed decisions about the administrative and structural needs of your business and ensure that your business framework aligns with the law and your business goals.
