Now that you have chosen the name of your new business, you are ready to introduce it to the world. As part of your business start-up checklist, you made the decision that you want to transition from sole proprietorship to incorporated entity. However, you are not sure if you want 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 business for success. Some things to think about when making this decision are:
Amount of paperwork you want to deal with annually
How 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 business assets and you no longer mix them. What this means is that if there is ever a dispute and you find yourself in court being sued, in most cases, your personal assets are protected, this includes your home, your car, and your personal bank accounts.
Name protection – Incorporating your company is a crucial step in branding. But name protection is also a benefit of incorporating a business. When your company is incorporated, the company name is protected at the state level.
Credibility – When presenting your business to potential customers, suppliers, business partners and potential investors, it is important that they consider it credible. This is especially important when looking for financing for your business. Credibility is important as you search for business loans, grants, and other forms of financing. Establishing a legal business structure for your business will add credibility to your business.
Fiscal benefits – Whether you choose to form a corporation or an LLC, you will be awarded 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 provides you with the protection of a corporation while providing you with the transfer of taxes from a sole proprietorship or partnership of two or more individuals. Additionally, an LLC can also choose to pay taxes as a corporation.
An LLC is created by filing articles of organization or a certificate of formation with the Secretary of State in the state in which you choose to form it and pay the appropriate fees.
An LLC is favorable in many scenarios because, while it provides protection, it is not as formal as a corporation in the sense that there are no formal requirements for annual meetings. Under this type of entity, the members who are the owners are required to create an operating agreement that describes the management of the company.
Corporation: the formal business entity
A corporation differs from an LLC because 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 it and pay 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. The shares can be sold to raise capital for the corporation.
A corporation is a more formal type of business structure due to its requirement to have an annual meeting which must be documented in the formal minutes. In addition, the bylaws must be adopted and maintained. If the corporation does not meet its annual requirements, the corporate veil can be pierced, which means that the corporation runs the risk of 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.