Are you planning to embark on your own entrepreneurial venture in the near future? If so, you will have a seemingly endless number of important decisions to make that relate to the business. By far, one of the most important decisions you will need to make is which legal entity to choose for the structure of your business. There are three basic structures for a business – sole proprietorship, partnership, and corporation. In addition, there are several hybrids and sub-categories from which you can choose. For example, many people find themselves having the “limited liability company vs. corporation” debate when deciding which entity to choose for their fledgling business. The best way to decide which legal structure is right for your business is to consult with an experienced attorney; however, learning more about each option may also be helpful.
Why Is Your Choice of Legal Structure So Important?
Deciding which type of legal entity to use for your business will have a direct impact on many aspects of your business. The legal entity you choose will determine whether or not you have any personal liability for the debts and liabilities of the company, for example. It will also decide how the business is taxed. It is important, however, to understand that there is a difference between a tax entity and a legal entity. A tax entity refers to how the IRS views and treats the business whereas a legal entity refers to the way a court would view and treat the business. This is particularly important to understand when discussing a limited liability company, LLC, because the IRS does not recognize a separate tax category for an LLC. Consequently, an LLC is able to choose how it wishes to be treated for tax purposes, as a sole proprietorship, a partnership, or a corporation.
Limited Liability Company vs. Corporation – A Comparison
The following are some of the most common factors used to compare business entities:
- Taxation – as previously mentioned, an LLC can be treated as a sole proprietorship, a partnership, or a corporation for tax purposes. Both sole proprietorships and partnerships are taxed at the personal income tax level, meaning the business profits and losses are passed down to the owners and reported on their income tax returns and taxed at their tax rate. A corporation, however, uses a double taxation scheme. The corporation files a tax return and pays taxes first because it is considered to be a separate legal entity. Profits and losses are also passed down to the shareholders of the corporation and must be reported on their individual tax returns as well.
- Ownership – the owners of a corporation are shareholders who buy into the company by purchasing stock shares. The owners of an LLC are referred to as members. With a corporation, the degree of ownership you hold in the company is directly related to the number of shares purchased, or capital investment you made, in the company. With an LLC, ownership can be distributed among the members in any way the members wish without regard to the capital contribution made by the individual members.
- Management – when it comes to managing the two options, a corporation has a much more strictly defined management structure than an LLC. A corporation is managed by a Board of Directors whereas an LLC may be managed by any member, or combination of members. Furthermore, although the shareholders of a corporation are legally the owners of the company, the Board of Directors makes management decisions and the corporate officers run the business on a day to day basis. With an LLC, there is no required distinction between the members and managers of the company.
- Investors – from an investor perspective, a corporation is often considered more attractive because of the corporation’s ability to offer different classes of stock to investors.
For more information, please join us for an upcoming FREE seminar. If you have additional questions about the limited liability company vs. corporation decision, contact the experienced North Dakota attorneys at German Law Group by calling 701-738-0060 to schedule an appointment.