Choosing Between an LLC and a Corporation
What Entrepreneurs Need to Know
As an entrepreneur, choosing the right business structure is one of your most important early decisions. This choice affects your tax liability, legal responsibilities, and personal asset protection. Here’s what you need to know about LLCs versus corporations.
Limited Liability Companies (LLCs)
Asset Protection & Tax Advantages
An LLC limits your personal liability while offering tax flexibility. It provides the legal protection of a corporation with the operational flexibility of a partnership.
LLC members can be individuals, corporations, partnerships, or other legal entities, with no residence or age requirements. Members don’t need to be listed in the Articles of Organization.
Formation in New York
- Check name availability through the Department of State
- File Articles of Organization
- Pay the $200 filing fee
Tax Advantages
LLCs are “pass-through entities” — profits go directly to members without being taxed at the business level. This avoids the double taxation that corporations face. Members report their share of profits and losses on individual tax returns.
For single-member LLCs, the IRS treats them like sole proprietorships. For multi-member LLCs, they’re treated like partnerships. Each owner pays personal income tax on their distributive share of profits and losses as outlined in the operating agreement.
Members can elect corporate taxation by filing IRS Form 8832, which may be beneficial when retaining significant earnings in the business.
Corporations
Separate Business Entities with Additional Benefits
Corporations offer unique advantages including specific tax deductions, employee health benefits, and the ability to offer stock options and purchase plans. Shareholders are the owners of a corporation.
Formation in New York
- File Articles of Incorporation
- Incorporators must be natural persons 18 or older
- Foreign entities can form C Corporations but not S Corporations
Tax Considerations
C Corporations face double taxation: corporate taxes on profits plus shareholder taxes on dividends. S Corporations avoid this by functioning as pass-through entities, similar to LLCs.
Investment Advantages
Corporations can issue stock shares to attract investors. Shareholders can buy and sell shares to adjust their ownership stake. The corporate structure enables business continuity even when ownership changes.
Making Your Decision
Your ideal business structure depends on:
- Expected profits and losses
- Startup costs
- Desired income draw
- Products or services offered
- Current and future tax situations
- Geographic considerations
- Plans for investment and expansion
*Note: This information provides general guidance only. Consult legal and financial professionals before making decisions about your business structure.
