How to structure your company is one of the first decisions you need to make when starting a business. Although some business owners operate as a sole proprietorship or partnership, many want the added personal liability protection afforded by creating a corporation or limited liability company (LLC). Which of those two structures is right for you? Here are some questions that can help provide direction.
What structure aligns best with your tax strategy? LLCs don’t pay income taxes, but instead pass profit and loss directly to the members (owners), who pay income and employment taxes on both their wages and the pass-through income. Corporations pay income taxes as well as employment taxes on wages, then shareholders pay taxes on profits (dividends) that are passed through to them, creating a double-taxation situation. A special type of corporation, an S Corp, avoids the double-taxation situation with a pass-through structure, similar to an LLC. Consult your accountant to determine which is best for you.
How important are benefits? LLCs can offer fringe benefits, but fewer options are allowed than with corporations.
How much paperwork do you want to do? LLCs involve much less paperwork than corporations—not just to set up, but also to continue operations. Corporations must hold regular meetings and keep written minutes of those meetings, neither of which is required for an LLC. And in some states, LLCs don’t have to file annual reports, which corporations do.