Business owners looking for the liability protection that a corporation can provide, without the double taxation, should consider forming a limited liability company (LLC). An LLC is a business entity with all the protection of a corporation plus the ability to pass through any business profits and losses to your personal income tax return. Show
An LLC is a hybrid type of business structure where the owners of the LLC are called “members,” and all enjoy the advantages that an LLC has to offer. LLC members can be an individual business owner, several partners, or other businesses. Pros of an LLCThere are three main benefits of establishing an LLC:
Cons of an LLCThe disadvantages of forming an LLC are relatively minor:
Forming an LLCSince an LLC is separate from you as an individual, you’ll need to choose a business name that is different from your own and that no other LLC in your state is already using. Your official business name should have “LLC” at the end, such as Designer Shoes Galore LLC. After choosing a business name, you’ll need to complete and file Articles of Organization, which is a form that lists the company’s name, address, and all of the names of the members. Articles of Organization are typically filed with your state’s Secretary of State, but double check in your own state to be sure. Alaska, Hawaii, and Utah have no Secretary of State and in Massachusetts, Pennsylvania, and Virginia you’ll file with the Secretary of the Commonwealth. There is typically a filing fee to be paid as well. Once you’ve filed the Articles of Organization, you’ll then need to apply for any business licenses and permits you’ll need to operate legally. Finally, check with your state’s income tax authority to learn whether your state taxes LLC income. LLCs are not taxed at a federal level, but some states do tax LLC income. Choosing an entity type for your small business has far-reaching implications on how you run, grow, and pay taxes on your business. Two of the most common types are a limited liability company (LLC) and a corporation. They may seem similar at first glance, but in reality, they’re designed very differently. A corporation comes with much stricter regulations governing how the company is managed, but also with more options for fundraising. Explore how each business classification works and how to determine which is best for your business. What is an LLC?A limited liability company is a business structure that offers some tax benefits and personal liability protection. An LLC can have one or more owners (called “members”). Both sole proprietors and business partners can form an LLC to protect their personal assets. Additionally, LLCs avoid double taxation because they don’t have to pay corporate taxes. Company profits are passed through to the owner(s) and reported on their personal tax return. However, LLC members are considered self-employed by the IRS, so they do have to pay self-employment tax. LLCs can opt to be taxed as an S corporation to lower some of the tax liability for the owner (who would be an employee who receives a W2 form from the company). Payroll taxes apply to their salary, but profit distributions aren’t subject to self-employment tax. Although it can be taxed as an S corp, an LLC is not considered a corporation. What is a corporation?A corporation is a business entity that is owned by shareholders, but which is entirely separate from its owners. As a legal entity, a corporation can employ people, enter into agreements with other companies, and borrow money. There are a few important elements that distinguish a corporation:
S corp and C corp are subtypes of corporations. They’re also corporate tax designations. A corporation is by default classified as a C corp for tax purposes. LLC vs. corporation: similarities and differencesLLCs and corporations have some basic similarities—they’re both legal entities that afford their owners liability protection, for example. But they have far more differences, especially in how they’re taxed and what options they have for fundraising by selling ownership of the company. Liability protection
Formation
Outside investment
Taxation
What are the advantages of an LLC?Business owners may benefit from a range of advantages as an LLC, including:
What are the advantages of a corporation?Forming as a corporation comes with advantages for some types of businesses.
Final thoughtsThe choice between an LLC or a corporate business structure is a deeply individualized one. It comes down to how you want to manage your company, pay taxes, and use external investment to grow. You might consider these questions when making the decision.
Topics: Starting Up Join 446,005 entrepreneurs who already have a head start.Get free online marketing tips and resources delivered directly to your inbox. Email addressSubscribe No charge. Unsubscribe anytime. Thanks for subscribing.You’ll start receiving free tips and resources soon. In the meantime, start building your store with a free 3-day trial of Shopify. What does it mean if a corporation has limited liability?A limited liability company (LLC) is a business entity that prevents individuals from being liable for the company's financial losses and debt liabilities. In the event of legal action or business failure, liability is assumed by the company rather than its constituent partners or shareholders.
Is a limited company a corporation in Canada?different from a corporation with a name that ends with Ltd. or Corp.? The answer is no. There is no difference between the corporations in Canada. They have the same rights, responsibilities and status in law.
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