WHICH IS BETTER A LIMITED LIABILTY COMPANY OR A CORPORATION?
As a business attorney the question we are most commonly asked is “Which is better an LLC or a corporation?” While there are several factors in determining which is the best structure for your business overwhelmingly we suggest a limited liability company as the preferred business structure.
Ease of Creation
While each state varies, both structures are similar in their filing procedures. Limited liability companies and corporations require filings with the secretary of state. (See our article on how to set up a business in Nevada) Additionally, corporations require you to decide whether or not your company will issue stock, the stock value, etc. Limited liability companies do not require this determination.
Both corporate structures provide the individual business owner with asset protection, though in some states, limited liability companies can provide individuals with additional protection. In those states, a judgment against a corporation can force the sale of the corporate stock in the amount of the debt. For a limited liability company the collectable debt is limited to profits earned from the company, which means that if that money stays in the company and is not disbursed to the members, a judgment holder cannot force the sale of the company.
One of the main advantages in a limited liability company is the business owner’s ability to choose the way the entity is taxed. A limited liability company can choose one of the following tax structures:
1. Sole Proprietor
4. K-corporation (if you have at least two members)
A corporation has more limits on the choice of taxation structure:
Determining which tax structure is best for your company is an important decision that should be discussed with your tax advisor.
Maintaining your Business
The biggest advantage to the creation of a limited liability company is that is has fewer formalities to maintain the corporate fiction. As a corporation, you must have meetings with shareholder and board of directors. The frequency of these meetings vary from state to state, but must be documented with minutes or resolutions for both. Additionally, some states require an annual report to be filed with the secretary of state. Failure to file this report can terminate your corporation and thus eliminate the asset protection that you set your corporation up to create. This documentation, is not required with a limited liability company. Eliminating the need for this additional documentation can save you time and protect your company’s corporate structure.