When starting a business, one of the hardest parts could be picking the type of legal entity to use. How do you decide between an LLC and a corporation? Here is a breakdown of each entity’s advantages.
Limited Liability Company
Want limited liability for investors with a simple and flexible structure? A limited liability company, or LLC, may be for you. For a smaller business, the structure of an LLC can be an advantage: LLCs have members and optionally, managers. The members usually invest part of the LLC’s starting capital and may participate in management. Managers direct the LLC’s affairs to save members the obligation. Members who do not take part in the LLC’s management face little or no risk of liability for acts of the LLC or for paying its debts, depending on state laws.
There are many fewer regulations and other laws governing LLCs than corporations, especially public corporations. LLCs either follow “default rules” or have their own rules as described in the operating agreement. Pass-through taxation, for those that choose it, simplifies part of LLC management. An LLC can choose whether to be taxed as a sole proprietorship, partnership, S corporation, or C corporation. LLCs that are taxed as partnerships use pass-through taxation and can allocate each member’s share of income or loss in a different way than the proportionate member ownership interests.
If you have a large number of investors or you plan on going public, a corporation may be right for you. Corporations issue shares or stock to their investors, who become shareholders holding part ownership in the corporation. Most corporations have officers and directors who manage the corporation’s affairs for the shareholders. Because of this structure, corporations are better suited than LLCs for large, growing businesses.
Not all corporations are large and public. In many smaller corporations shareholders are also officers or directors. These shareholders may be paid a salary and receive benefits because of their officer or director position, in addition to the advantages of holding shares in the corporation. Further, corporations can offer employees stock options to incentivize their work for the corporation.
Like limited liability companies, corporations provide liability protection for both shareholders and directors. There are some exceptions for directors, but for the most part the corporation bears the brunt of lawsuits. Corporations can be taxed as S-Corporations – taxed through shareholders, for smaller corporations who choose the option only – or C-Corporations – taxed directly because they are too large to be classified as an S-Corporation.
Need legal help for your growing business? Norris Law Group’s attorneys advise clients on the intricacies of Wyoming and Utah business and corporate formation law. Contact Norris Law Group today by emailing Norris Law Group attorneys, calling (801) 932-1238, or visiting the Utah or Wyoming offices.