Why Should you form a Corporation or LLC?

There are many different reasons to incorporate your business, first of all, limited personal liability. If a court judgment is entered against your corporation or LLC, your personal bank accounts and any other valuable property will be protected. If a business has more than one owner, incorporating can offer protection from any bad judgments of your co-owners. Also, there are many tax-related advantages given to corporations and LLCs that aren't given to sole proprietors or general partnerships. A C-corporation can treat fringe benefits given to employees, such as medical and dental insurance, as tax-deductible business expenses. Other reasons to incorporate include credit building and investor attraction.

Entity Characteristics:

 

C-Corporation

S-Corporation

Limited Liability Company

Management

Centralized management, only a few people in control.

Centralized management, only a few people in control.

Either managed by a Manager or by the Members as provided for in the entity's charter.

Continuity

Perpetual existence.

Perpetual existence.

Usually perpetual existence.

Transferability of Interests

Interests are freely transferred unless restricted by Shareholders' Agreement

Interests are freely transferred unless restricted by Shareholders' Agreement

Interests of members cannot be transferred with consent of other members.

Limited Liability

Shareholders are protected from personal liability.

Shareholders are protected from personal liability.

All members are shielded from personal liability.

Taxation

Income and loss remains with the corporation. Corporation pays the tax. Dividends are taxable to the shareholders, thus creating "double taxation".

Income and loss pass through to the members to be reported on their tax returns. No tax is paid by the entity.

Income and loss pass through to the members to be reported on their tax returns. No tax is paid by the entity.

Entity owned by

Shareholders

Shareholders

Members

Minimum # of persons needed to establish

1

1

1

Depending on the nature of the business and the number of people who wish to be involved, each specific entity offers advantages and disadvantages. Some may value alienability of assets more highly than others whereas someone else's main concern is to avoid paying as much tax as possible. While this chart may provide useful information in helping you determine which entity may be best for you, it should not be viewed as legal advice. Based on the current tax and business laws, you should seek the advice of a business law attorney and or CPA to help you decide which entity will help you achieve your individual goals.

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