Now that you’ve chosen a name for your new business, you’re ready to introduce it to the world. As part of his business startup checklist, he made the decision that he wants to transition from a sole proprietorship to an incorporated entity. However, he is not sure if he wants to form a Limited Liability Company or a Corporation.
This is one of the most important decisions you can make as a business owner that will position your company for success. Some things to consider when making this decision are:
Amount of paperwork you want to deal with annually
How do you want to raise capital?
Regardless of the type of corporate entity you choose, it is important to understand that the decision to form an established business entity has many benefits:
asset protection – The main advantage of forming a corporation or LLC is asset protection. Once you create a business entity for your business, your personal assets are separated from your business assets and you no longer mix them. What this means is that if there is ever any litigation and you find yourself in court being sued in most cases, your personal assets are protected, this includes your home, car and personal bank accounts.
name protection – Incorporating your business is a crucial step in branding. But name protection is also a benefit of incorporating a business. When your business is incorporated, the business name is protected at the state level.
Credibility – When presenting your business to prospective customers, suppliers, business partners and potential investors, it is important that they see you as credible. This is especially important when seeking financing for your business. Credibility is important when looking for business loans, grants, and other forms of financing. Establishing a legal business structure for your business will bring credibility to your company.
Fiscal benefits – Whether you choose to form a corporation or an LLC, you will be given tax benefits that you did not receive as a sole proprietor. However, it is important to consult with a tax professional to understand the tax implications of both types of business entities.
Forming an LLC
The simplest form of business entity is an LLC. An LLC gives you the protection of a corporation while giving you the tax transfer of a sole proprietorship or partnership of two or more people. In addition, an LLC can also choose to be taxed like a corporation.
An LLC is created by filing Articles of Organization or a Certificate of Formation with the Secretary of State in the state you choose to form and paying the appropriate fees.
An LLC is favorable in many scenarios because, while it provides protection, it is not as formal as a corporation in that there are no formal annual meeting requirements. Under this type of entity, the members who are the owners are required to create an operating agreement that outlines the management of the business.
Corporation: the formal business entity
A corporation differs from an LLC in that it is a more formal type of business entity. A corporation is created by filing Articles of Incorporation or a Certificate of Incorporation with the Secretary of State within the state in which you choose to form and paying the appropriate fees.
A corporation is governed by a board of directors that appoints the officers responsible for running the business. Corporate ownership is determined by the shareholders who own shares. Stock can be sold to increase the capital of the corporation.
A corporation is a more formal type of business structure due to its requirement to have an annual meeting that must be documented in the formal minutes. In addition, bylaws must be adopted and maintained. If the corporation does not meet its annual requirements, the corporate veil can be lifted, meaning the corporation risks losing its protection.
Now that the basic differences between forming a corporation or an LLC have been outlined, you can make an informed decision. Congratulations as you progress on your journey as a business owner.