The Malta Independent 21 September 2021, Tuesday

Comparing U.S. Business Entities: LLCs vs Corporations

Wednesday, 15 September 2021, 08:00 Last update: about 5 days ago

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A surge in business formation and registration has continued through May 2021 and recent studies show that the pace of applications since mid-2020 is the highest on record. Legal entities in the Eurozone are quite different to that of our counterparts in the U.S. Let’s take a closer look:

Anyone starting a business in America and looking for a legal entity that can grow with them are likely to weigh up various structures. The business structure you select can have a significant impact on some critical issues in your business life. These concerns include your exposure to liability as well as the rate and manner in which you and your business are taxed. It can also have an impact on your financing and ability to grow the business, the number of shareholders the business has, and the general way the business is run.

The Small Business Job Protection Act of 1996, which included a number of changes to basic corporate tax law, such as allowing S corporations to hold any percentage of stock in C corporations, propelled both LLCs and S corporations to the forefront.

Limited Liability Company (LLC)

Due to the basic benefits of liability protection, limited liability companies (LLCs) are popular and are typically used by a sole proprietor (single owner) or a company with two or more owners (partnership). LLCs shield the owners' personal assets from company losses, debts, and court rulings. Because LLCs are taxed differently than traditional corporations—or C Corporations—they may also provide some tax benefits.


Why choose an LLC?

As previously stated, an LLC provides the owner or owners with limited liability, which means that each owner is not personally liable for any company-related lawsuits or debts. In other words, creditors cannot seize or collect funds from your personal assets to pay off the business's debts. Creditors can only seize the company's assets. When compared to a corporation, LLCs are easier to set up and run. Corporations are required to have directors, officers, and board meetings.

LLCs have tax advantages because the company's income and losses are reported on the owner's personal tax return. This prevents the profit generated by the business from being taxed both at the business and personal levels when the owner receives a salary from the company. Instead, the profit generated by the business is routed through the business entity and reported only once for tax purposes on the owner's personal tax return.

Another advantage of LLCs is that they can be structured in a variety of ways. There are no restrictions on the number of owners, known as members, and LLCs can operate with just one owner, much like a sole proprietorship. LLCs also allow the owner to appoint a manager to run the company, who could be one of the designated members, a non-member, or a combination of the two.

Corporations

A corporation is an organization—usually a group of people or a company—that has been authorized by the state to act as a single entity (a legal entity recognized by private and public law "born out of statute"; a legal person in a legal context) and has been recognized as such in law for specific purposes.

The ability to raise funds through the issuance of stock is the primary advantage of a corporation over other entity types. However, it's critical to understand that by allowing stockholders to vote on how the company is run, you're essentially delegating some of your decision-making authority to someone else. If you want complete control, an LLC or another entity type may be a better choice. Having others share the burden of responsibility may alleviate some of your burdens.

Why choose a corporation?

There are numerous benefits to forming a corporation. The most significant advantage is the limited personal liability that comes with being a corporation.

Your personal assets are safeguarded by what is known as the "corporate veil." If the corporation goes into debt or gets into legal trouble, you cannot use your personal bank accounts, house, car, or investments as collateral. (It should be noted that the corporate veil only serves as protection when the corporation adheres to the legal requirements.)

Another advantage is that a corporation can raise funds by issuing stock. Stock can only be sold by corporations. Private and public corporations can both issue stock, but public corporations benefit the most from doing so. Corporations can gain funds for new projects and campaigns that would otherwise be unattainable by selling stock or shares. Corporations can also deduct the cost of certain employee and officer benefits. This deduction provides a tax break that not all entity types are eligible for.

Final Word

Because there are fewer operational regulations and reporting requirements, LLCs are less expensive to establish, as well as easier to maintain and remain compliant with applicable business laws. Nonetheless, the corporation format is preferable if the company intends to raise significant outside capital or to issue common stock in the future.



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