Incorporating a business and forming an LLC (Limited Liability Company) offer many advantages to a small business owner.
Limited Personal Liability
Both structures limit liability to the amount shareholders or members invest in the company. Therefore personal assets, including homes, cars, savings and investments, are protected from the liabilities and risks of the business.
Ability to Raise Capital
Both structures allow a business to borrow money and sell equity to raise capital.
Both structures continue indefinitely, unless they are dissolved.
LLC - Fewer Corporate Formalities
An LLC generally requires less corporate formalities than a corporation. An LLC may be managed directly by members; there is no need to have a separate board of directors or annual shareholder meetings and periodic directors meetings with minutes. For many, the convenience and simplicity of forming a single-member LLC that is managed by the member provides the limited liability protection without adding a lot of corporate bureaucracy.
LLC - Pass-through tax treatment
LLC's provide pass through tax treatment and avoid an entity level tax. This means that an LLC is not a separately taxable entity and business income or losses are reported on the individual tax returns of the owners. This is similar to an S-Corporation, but different from a C-Corporation, which is a separate taxable entity. For those LLC owners who wish to be taxed as a corporation, however, they may elect such tax treatment by making a filing with the IRS.
LLC - Flexible Profit Allocation
Another advantage of an LLC over a corporation is the ability to allocate profits and losses among the members as the members agree, while in corporations dividends can only be paid pro rata according to share ownership. The IRS allows for special allocations for LLCs and we recommend consulting your accountant or tax advisor to learn more about this option.
LLC's do still require State Filings, though they are different from those for Corporations. Articles of Organization must be filed with the Secretary of State to form an LLC and the members of the LLC are required to enter into an Operating Agreement that governs how the LLC will be operated.
Number of Owners
Another difference between a corporation vs an LLC is that while both can have multiple owners, there are differences in how many. LLCs and C-Corporations can have an unlimited number, while S-Corporations are limited to 100 Shareholders.