When you incorporate your business, you transform it into a legal entity that is separate from you and any other person who founded it.
This comes with many benefits, from new ways of filing taxes to changes in liability. However, the benefits that you enjoy will depend on the new company structure you choose: LLC or corporation (generally an S or a C corporation).
Which is right for your business?
The benefits of becoming an LLC
The biggest benefit of becoming an LLC is limited liability. This is designed to prevent the owners of the business—the members of the LLC—from being held personally liable for actions of the company. Broadly speaking, in the event of a lawsuit, your personal assets are protected.
LLCs are also more flexible in their management structure. When you become a corporation, you are tied to a specific structure that is top down, with the directors overseeing the managers, the managers overseeing their employees, etc. An LLC can have whatever management structure works best for your company.
However, perhaps the biggest benefit of an LLC is that it offers you pass-through taxation. This means that the business itself does not pay taxes, only you do on your personal tax return. This prevents double taxation and keeps all your taxes in a single return.
The benefits of becoming a corporation
The benefits of becoming a corporation will depend on the type of corporation you choose. The most common types are S and C corporations. S corporations offer the pass-through taxation that LLCs also enjoy, while C corporations do not.
S corporations allow business owners to write off certain business losses on their personal taxes as deductions and also can help with tax savings. Income from outside the business can be offset with losses related to the business. However, there are greater restrictions placed on S corporation than on C corporations, particularly in the number of owners allowed—100 or fewer—and the citizenship status of the owners.
This may make it sound like C corporations aren’t a good choice, since S corporations have so many benefits. However, with a C corporation, owners can hold a variety of stock interests, making it ideal for those looking to grow their businesses into large enterprises, such as professional investors.
Insurance coverage
Liability coverage is still necessary because limited liability can be waived in certain circumstances, for example:
- If you personally guaranteed a loan
- Acted negligently or irresponsibly
- Mixed personal and business expenses
Ultimately, there is no definitively correct answer when it comes to choosing between an LLC and a corporation for your business. But no matter what structure you choose, liability insurance is important. To learn more about liability insurance options, speak to the experts at John B Wright.
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