If you form a limited liability company (LLC) out of your business, this is a great way to protect your personal assets from your company’s liabilities. Incorporation protects your property, if a judgment is entered against your business. Also, forming an LLC gives you an advantage, since your company is not responsible for the taxation of your profits.
The owner of an LLC reports the profits and losses of the business on his personal tax return. This works in a similar way to general partnerships or sole proprietorships. These are called “pass-through” taxes, and you won’t have to file a corporate return if you own an LLC. Your share of the gain or loss is reported on your individual tax return.
No residency requirements
When you form an LLC, you do not have to live in the state in which it is formed. You don’t even need to be a US permanent resident or US citizen. For this and other reasons, immigrant-owned businesses are typically formed as LLCs.
LLCs give your business more credibility with potential customers, vendors, partners, and lenders. The LLC is often viewed favorably by other businesses.
LLCs have a flexible management structure. Your LLC can establish any type of organizational structure that the owners agree upon. It can be managed by owners, known as members, or by administrators. This differs from corporations, which are required to have a fixed board of directors that will oversee all of the company’s major business decisions. They will also take care of all matters on a day-to-day basis.
LLCs face fewer ongoing paperwork and annual requirements imposed by states than corporations. Also, there are fewer restrictions on who can own an LLC, unlike the rules found with S Corporations.
You may also be considering how to incorporate a business as an S-Corp or C-Corp, if you plan to incorporate rather than seek registration as an LLC.
What is an S Corporation?
An S Corp has similarities to LLCs, because its federal tax status also allows for the transfer of taxable income or loss to investors or owners. Your company will not be double taxed as it is with a C corporation. S Corp status offers you pass through taxes, limited liability protection, investment opportunities, and elimination of double taxation on business income. An S Corp can also continue to function even if the original owner dies.
What about a C Corporation?
If you prefer to incorporate, rather than become a Delaware LLC or an LLC in your home state, the C-Corp is the most common type found in the US. When you form a C-Corp, you will create a structure separate law that protects personal assets from any lawsuit against your business. The C-Corp structure includes officers, shareholders, and directors.