When starting a business, you’re probably thinking about ways to save money on taxes and increase operational efficiency. However, establishing the proper business structure is also critical for various reasons. The proper legal structure can significantly impact your company’s success.
For example, if you create an LLC in Texas, you may be able to take advantage of tax breaks and other business benefits available to LLCs. Besides an LLC, you may have also considered forming a corporation or incorporating your business. LLC and Incorporation are viable options for startups, but you should weigh them individually.
That said, before deciding between an LLC and an Incorporation, it’s critical to understand what each structure provides and how they operate.
Read the following information to determine which business structure is best for your company.
What Is An LLC?
An LLC business structure is a hybrid of a corporation and a partnership. It’s also sometimes referred to as a limited liability company (LLC).
LLC can be formed in three ways:
- Filing articles of organization with the appropriate state agencies;
- Creating the entity through a state-approved online platform;
- Through an online platform that works with an existing business structure.
Moreover, the members of an LLC are the owners. Members may have limited liability if they’re personally liable for the company’s debts and are authorized to transact business in their name. In most states, an LLC must have no more than two members. Some states, however, don’t require such restrictions.
In addition, members of an LLC must file annual reports with the state agency that registers it. These reports detail the money earned and paid out during the fiscal year. They also include information on the changes made to the registered agent or office location during that period.
Furthermore, here are the advantages and disadvantages of an LLC business structure:
Advantages Of An LLC
An LLC is a type of business structure that’s similar to a partnership but without liability. The owners aren’t personally liable for the company’s debts, obligations, or other liabilities. If you form an LLC, your personal assets aren’t at risk if you fail to pay your bills on time.
Furthermore, if a creditor sues one of your members individually, the creditor must sue all members jointly. That means when you file an answer to the suit, it doesn’t matter which member was sued in what capacity. You must respond as a group for all members.
Moreover, the other advantage of forming an LLC is that it allows you to successfully run your business under the laws of any state without changing the ownership structure. This means as long as contracts are properly recorded following applicable state law, any state will recognize and enforce agreements between members during their term.
Disadvantages Of An LLC
The main disadvantage of using an LLC is that it doesn’t protect personal assets from creditors or third-party lawsuits filed against members individually. If you’re sued independently in court, you’ll be liable for any judgment against your personal assets, regardless of how much money you or others associated with the LLC put into the business.
Moreover, startups can set up a limited liability company in a state that doesn’t recognize the legal entity. This means any contracts made by members won’t be enforceable by law. It’s also worth noting that an LLC is taxed differently than a corporation or partnership. It’s taxed as a pass-through entity, which means that it doesn’t pay taxes; instead, it passes its profits or losses on to its members.
As a result, small business owners who don’t make much income from their companies won’t have to file individual tax returns. However, note that the IRS may consider any losses incurred by an LLC to be personal and, therefore, taxable.
What Is Incorporation?
An incorporation, also known as a corporate legal structure, is a formal organization of individuals or entities with the authority to sue, be sued, and make decisions on behalf of other individuals or entities. Many think of a corporation as a massive business entity that creates profits for its shareholders and pays taxes. However, corporations can also be used for many other purposes—including holding assets and managing money for wealthy individuals.
Moreover, a corporation differs from a sole proprietorship in that it has shareholders who own stock in the company. Shareholders elect directors to oversee the company’s day-to-day operations. Directors manage these operations through meetings with managers and employees.
In addition, a corporation is different from a partnership because they have legal personalities separate from their owners’ respective identities. Hence, they can hold assets and make contracts on their own behalf without going through partners.
Furthermore, the following is a brief description of the advantages and disadvantages of a corporate legal structure:
Advantages Of Incorporation
Incorporation allows you to take advantage of certain tax advantages that aren’t available to other business legal structures. For instance, if you’re a sole proprietor, your income is taxed when it’s earned. However, if you incorporate, your revenue can be taxed at the corporate level and then distributed to shareholders as capital gains.
Moreover, it grants you access to more sophisticated financial and legal services than you would have as an LLC. In particular, when you incorporate, it’s easier for your business to negotiate deals with vendors or lenders because you have a more stable legal entity on which to base those negotiations.
Disadvantages Of Incorporation
Incorporation has several drawbacks. Notably, many corporations are obligated to make their financial affairs public. When they do so, the information obtained becomes a public record and may use against them in court. As a result, it can harm a company’s reputation and deter potential investors.
Moreover, an incorporated company is not immune from lawsuits from employees or customers who feel wronged by the corporation’s actions or products. Some states also have laws that govern incorporations and corporate records, making doing business in those states difficult.
In addition, if a corporation seeks public funding for a project or service, such as infrastructure development, it must file for an exemption before receiving the subsidy.
Lastly, there’s no one-size-fits-all solution, and LLCs and corporations have unique pros and cons. Choosing a business structure depends on your personal goals and what works best for your situation. What matters most is you carefully weigh your options and run the numbers before deciding on a business structure. If you put in the extra effort now, you’ll set up your company for long-term success.