If you are getting ready to launch your own business, you’ve thought about your options. You want to be able to have a business name, be recognized by the state you have your business in, protect your assets and have the best tax privileges. Choosing to structure your business as limited liability company (LLC) or a straight incorporation (Inc.) will depend on several factors.
A limited liability company often will not have any technical employees. That is, whatever profits the company makes, the owner(s) keep and deposit directly into their business or personal bank account. Incorporations will have actual employees with regular I-9 and W-2 employee paperwork to be filled out and kept track of. In this case, the owner would have a title say of “CEO” and will have filed a W-2, etc. … and receive an actual paycheck made out from the company to her name as an employee. The CEO could choose to have a salary or an hourly wage assigned to herself to accomplish this.
Limited liability company owners are taxed as though the income the business was made was personal income. They are allowed various self-employment business deductions just as a regular corporation is. Incorporations are taxed as an entity. The business pays separate taxes than the employee. For example if the corporation made $40,000, last year and the CEO was paid $20,000 in wages, the corporation would pay taxes on the $40,000, and the CEO would pay personal taxes on the $20,000. In this respect, the income made from the incorporation seems to be taxed twice.
Limited liability companies are started and owned with actual cash or credit, and profits and losses are measured in these terms. Incorporations are owned and held in stock. To structure your business as a corporation automatically means that your business has to distribute stock for available purchase and so requires more legal paperwork.
Starting a limited liability company has less paperwork during both start-up and registrations than a corporation. Fees vary from state to state for registration and taxes every year, but overall the cost of choosing a limited liability company is much less in time and money. Corporations also are required to have annual meetings with minutes taken and those findings published to stockholders and to the state. Limited liability companies do not.
Carefully consider the pros and cons of each option. If you want to avoid double taxation, extra time and expense in paperwork and ongoing maintenance, choose a LLC. If you want your assets to be owned and controlled completely by the company and not you for liability purposes and want profits taxed completely independently of your personal taxes, then choose incorporation. Either way, make sure you’ve consulted with legal counsel and received qualified tax advice when choosing a structure.