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What Structure is Best for You?
LLCs and Corporations are two different types of business structures that offer their own strengths and weaknesses. Both these business types will require you to file business formation documents with the state. Both protect company owners from personal liability for business obligations. In general, corporations have a more standardized and rigid operating structure and more reporting and recordkeeping requirements than LLCs. LLC owners have greater flexibility in how they run their business. Taxwise, LLCs have more options than corporations. LLCs aren’t tied to one particular tax classification and can be taxed as sole proprietorships, partnerships, C corporations or S corporations 12.
If you are unsure of which type of entity will ultimately work best for you and provide the greatest financial protection and the greatest tax planning and benefits, we are proud to recommend our professional friends and colleagues Reid Olsen, Tony Hendricks, and the other qualified personnel at Olsen, Hendricks & Webster, CPA's (olsencpa.com) in Meridian, with whom we have worked for the past thirty + years, as a premier authority for new and existing businesses.
LIMITED LIABILITY COMPANIES
What Is an LLC?
A limited liability company, or LLC, is a U.S. legal entity used to own, operate and protect a business. LLCs provide the same legal and financial protections corporations do but can be simpler to operate.
What Are the Benefits of an LLC?
Other common forms of businesses, including corporations, general partnerships and sole proprietorships, offer various benefits, but the LLC entity combines the advantages of each structure.
Asset Protection
The main advantage to an LLC is in the name: limited liability protection. Owners’ personal assets can be protected from business debts and lawsuits against the business when an owner uses an LLC to do business. An LLC can have one owner (known as a “member”) or many members. Businesses as well as individuals can be members of an LLC.
Versatility
LLCs are not required to have annual shareholder meetings or maintain a board of directors, nor are they bound by the administrative requirements often seen with corporations. Instead, an LLC’s members may organize how they like: Members or managers may manage the business’s operations as they see fit.
Legal Name and Credibility
State law usually doesn’t allow you to form a new business with the same name as an existing one. When you form an LLC, you gain the exclusive right to use your name as a business entity name in your state, and you also create a public record of your use of the name. The LLC moniker at the end of a company’s name can also lend credibility to a small business.
Taxation Options
LLCs also provide more flexibility than other business types as to how taxation functions. LLCs are automatically taxed as either a sole proprietorship or partnership, depending on whether there’s one member or multiple members. Members report their share of business income and expenses on their personal tax return and pay personal income tax on profits. Members who work in the business are considered self-employed and also must pay self-employment (Medicare and Social Security) taxes on their share of the profits.
If the entity wishes not to be taxed as a sole-proprietorship or partnership, the LLC can also elect to be taxed as an S-corp or C-corp. Corporate taxation allows LLC owners to be paid as company employees, participate in company benefit programs and potentially save on taxes. A C-corp pays corporate tax and its owners pay tax on distributions they receive. An S corp is a pass-through entity–it doesn’t pay corporate tax but each owner pays personal income tax on their share of the company’s profits. But not all LLCs qualify for S Corp. taxation–they must meet IRS requirements.
CORPORATIONS
Ownership Structure
A corporation is different from an LLC in that corporate owners are known as “shareholders” whose ownership percentages reflect the number of shares of company stock they own. It’s relatively easy for a corporation to authorize additional shares, or for shareholders to transfer their shares to someone else.
Taxes
There are two ways a corporation can be taxed. By default, corporations are C corporations. They file a corporate tax return and pay corporate taxes. If the shareholders take distributions from the company, they’ll report those distributions on their personal tax returns (along with any company salary they receive) and pay personal income taxes on them.
Some corporations can avoid this double taxation of distributions by electing to be taxed as an S corp. S corps don’t pay corporate income tax. Instead, the company’s profits pass through to the shareholders’ personal returns and each shareholder pays individual taxes on their portion. To be eligible for S corp. taxation, a corporation must have 100 or fewer shareholders and meet additional ownership requirements.
Management
In contrast with a Limited Liability Company, corporations operate with a much stricter management structure, with a board of directors overseeing the business and officers who manage daily operations. Shareholders must meet at least annually. Paperwork and record-keeping for shareholder and director meetings is extremely important with corporations.
Legal Liability
Both corporations and LLCs are limited liability entities. This means the owners aren’t personally liable for business debts or lawsuits against the business. Business owners do, however, remain liable for their own negligence and for any obligations on which they’ve signed a personal guarantee.
To maintain this liability protection, both corporations and LLCs should always keep business and personal finances separate. Owners should sign documents and contracts on behalf of the company, not in their own personal capacity. For corporations, additional documentation needs to be maintained as well. This includes corporate minutes, details on annual shareholder meetings, and information on its board of directors. LLCs and corporations also need to make required filings and reports to stay in good standing with the state. Both types of businesses must maintain a registered agent and update the agent information on file with the state as necessary. Most states require LLCs and corporations to file an annual report or franchise tax reports to maintain an active status. The annual report form will ask you to ensure you have updated information pertaining to your business and you will have to pay a filing fee. Some states require this to be completed every other year.
DBA (an Assumed Business Name)
Idaho Code § 30-21-8, et seq.The filing of an Assumed Business Name (ABN) in the Secretary of State’s Office has only one purpose – to give notice to anyone who inquires at the Secretary of State’s Office that the person(s) who filed the ABN is doing business under the name which has been filed in the Secretary of State’s database. The filing of an ABN does not create a distinct legal ‘person’ or any form of business organization. ABN’s should not be construed as an ‘Idaho Business License’.