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If you are thinking of creating a company in the United States, it is important that you know the differences between an LLC and a Corporation. These are two of the most common legal forms for businesses, but they have advantages and disadvantages that you should be aware of. In this article we explain the key aspects of each one and how to choose the one that is best for you.
An LLC (Limited Liability Company) is an entity that offers legal protection to its owners against debts and lawsuits that the business may have. The owners of an LLC are called members and can be natural or legal persons, national or foreign. An LLC does not pay taxes at the federal level, but the profits or losses are distributed among the members, who declare them in their respective income.
A Corporation is a legal entity separate from its owners, who are called shareholders, can issue shares and raise capital from investors.
A corporation pays federal taxes on its profits, and shareholders also pay taxes on the dividends they receive. This system is known as double taxation. There are two types of corporations: the C-Corp and the S-Corp.
The C-Corp is the most common form and has no limit on the number or type of shareholders. The S-Corp is an option for small businesses that want to avoid double taxation, but it has certain restrictions, such as a maximum of 100 shareholders who must be individuals and residents of the United States.
The choice between an LLC and a Corporation will depend on your goals, needs and preferences. Some factors you can consider are:
The level of legal protection you want to have against business liabilities.
The flexibility you want to have to manage and organize your company.
The type and amount of taxes you want to pay for your activity.
The possibility of accessing external financing or selling your company in the future.
Another option is to form an LLC and choose to pay taxes as a Corporation or S Corporation. The S Corporation is a tax status and not a separate entity.
This option combines the simplicity of an LLC with the tax benefits of a Corporation. You will need to apply for an LLC and then make this election. Choosing to have your LLC taxed as a Corporation or S Corporation does not affect its business operations or legal structure, only the way taxes are paid. However, there are rules and restrictions for this option and a non-negotiable term, so seek the help of an expert to avoid mistakes.
There is no one-size-fits-all answer, so we recommend that you consult a professional before making a decision.
When doing your research, seek expert advice, with BookkeeperPro, you can make an informed decision that will set your business up for success.