Incorporation means creating a new corporation. A corporation is an organization that is approved by your state to conduct business. It is a legal entity separate and distinct from its owners; a separate person in the eyes of the law.
Most people form corporations to protect their personal assets because the owners of a corporation are generally not personally responsible for the corporation’s debts. This is called “limited liability protection.”
The creation of this entity generally requires the preparation and filing of certain documents with The Secretary of State (or other appropriate department) in your state of formation, and running the corporation generally requires more formality than is required for most types of businesses.
The corporation is formed by an incorporator, owned by shareholders, managed by directors and typically operated by its officers.
Inc. vs. LLC: Which Is Right For Your Business?
If you’ve started a business of your own, you’ll eventually have to decide whether to set it up as a corporation or a limited liability company. Each of these has advantages and disadvantages, and a comparison between an Inc. vs. LLC can help you choose the best fit for your new endeavor. While both provide you with protection against loss of personal assets if the business fails or is losing money, there are a few key differences you need to understand.
Inc. vs. LLC: The Basics
While both incorporation and forming a limited liability company prevent creditors from pursuing your personal property in the event of business losses or lawsuits, incorporation is more complex and offers greater overall financial protection because it allows the company to offer stock options, create retirement plans and much more. An LLC protects your personal assets but is simpler in structure and doesn’t include stock options, retirement plans and other entities common to corporations.
Inc. vs. LLC: Profits
When discussing profits, the difference between incorporation and LLC formation is dependent on goals of the business and shareholders. If you choose incorporation, profits are taxed differently.
As a C Corporation, the business files business taxes, but can offer tax benefits in certain situations. It’s especially good if you want to use profits to reinvest in the growth of the business.
In an S Corporation, double taxation doesn’t happen, rather the profits are passed through the shareholders (depending on how many shares you own) to claim on their personal taxes. Personal taxation, therefore, with an S Corporation, works much like in an LLC.
If you form an LLC, all profits are considered part of your personal income and will be taxed accordingly, including social security and Medicare taxes deducted from your income, come tax time. There’s flexibility though with an LLC in how you or the members of the LLC choose to be taxed and viewed by the IRS. Still, the bottom line comes down to liability risk and how members want to deal with the formality of one over the other. Always consult a tax professional who can help steer you in the right direction.
Advantages Of Incorporation
The biggest difference between incorporation and LLC creation is the tax advantage of incorporation. If you are incorporated, you only need to pay yourself a reasonable salary out of your profits. The remainder of the profits will be distributed to you and any other owners as dividends, which are taxed at a much lower rate. It is more expensive to form any kind of corporation, and the government oversight of accounts and filings is quite stringent. If you want to bring investors and shareholders on board, incorporation is required so that you can issue stocks.
Advantages Of Forming An LLC
A limited liability company has a few downsides, including taxation of all of your profits as income, including social security and Medicare, with you being both the employee and the employer. Because this is a simpler structure, however, an LLC requires less paperwork, no mandatory shareholder meetings and less government oversight. Setting up a limited liability company is simple and inexpensive and takes just a few pages of paperwork.
At We the People USA, we can show you the difference between incorporation and LLC formation and help you fill out the appropriate paperwork so that you and your business are protected.
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