Five reasons why an LLC is a better business formation than a corporation

A Limited Liability Company is a form of business organization that combines the functions of a sole proprietorship or partnership with those of a limited company. With all the functions of a sole proprietorship, an LLC offers limited liability to the owners which means their liability is only limited to the funds that they have invested into the business and not their own belongings. That is, they are not personally liable to pay back the debts of the business.

A corporation is a business entity that operates completely differently from its owners. It had its own separate legal identity with taxation, loan operations and contracts. Both forms of business organization are usually small scale. A corporation is owned by the individuals that purchase shares in the company whereas an LLC is owned by individuals who set up the business. When comparing the two forms of organization, there are 5 major advantages that LLCs have over corporations:

1. Less Paperwork

An LLC is usually an informally run business and so, it may not be required to keep extensive records and/or hold annual meetings for all its members. A corporation, on the other hand, has to observe certain requirements when it comes to shareholder meetings and annual reports to the state as well as keeping records of every business transaction and account.

2. Taxation

Not having its own tax classification, an LLC can adopt the tax status of an unincorporated business depending on the number of owners. This means that a business organization which is an LLC can use “pass through” taxation in which the company does not pay any taxes itself. Instead, the company’s’ income passes through to the owner’s personal account (through a Schedule K) and the profits are then taxed via the owner’s income tax returns. This makes Tax Season a lot simpler.

The income received by corporations, on the other hand, is taxed twice, once before it is distributed among shareholders and then when the shareholder’s pay income tax on their private earnings.

3. Convenient Management

All corporations have a fixed structure of management that they need to follow which include their shareholder meetings and the election of the board of directors and this board overlooking the managers that operate the company on a day-to-day basis. In an LLC, however, there is no set structure and the owners have more freedom and choice when making any decisions about company policy or operations. They are not restricted and/or do not require going through a complicated decision-making process.

4. Flexible Ownership

LLCs have no restrictions on the number or types of owners they can have whereas a corporation usually is restricted to a hundred shareholders provided that all of them are individuals and not other corporations. More so, corporations are also not legally allowed to have oversees shareholders.

5. Flexible Profit Distribution

In an LLC, there is no set criteria on how company profits have to be distributed among owners. Any person who puts in extra effort in the form of labor or strategy development can be compensated through a bigger chunk of profits without any restrictions. This is thanks to the passthrough of taxes that we mentioned above.  Any LLC member that receives more profits/distributions from the company will also be taxed at a higher rate.  In a corporation, however, every shareholder receives a pre-set share of company profits according to the volume of shares they hold regardless of the amount of effort they put in helping the business run.


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