Understanding the Difference Between an LLC and Corp.
Are you a foreign investor interested in expanding into the U.S. market? It certainly makes sense. The U.S economy is growing with opportunities for U.S citizens and foreigners alike. In fact, in 2019, there were 3.2 million foreign entrepreneurs in the U.S., a number that has steadily grown since then. If you're a foreigner interested in getting your share of the U.S. market, you may be wondering whether an LLC or a Corp. is the best business structure. Today we're going to explain the difference between an LLC and a Corp, the pros and cons of each, and who these business structures are most suited for.
What is an LLC?
An LLC stands for Limited Liability Company, which is ultimately a U.S. business structure that's used to own and operate a business. All states do not follow the same regulations when it comes to forming an LLC. For this reason, check with the state you're starting your LLC with to see the specific rules and regulations are.
Any owners in an LLC are referred to as members. In most states, ownership is not restrictive. This means that members can be made up of a variety of people and entities, including individuals, corporations, partnering LLCs, and foreign entities. With an LLC, there is no maximum number of members, but you can also legally operate as a single-member LLC. When a single-member LLC chooses not to be elected as a corporation, this is considered a "disregarded entity", according to the IRS.
Keep in mind that some types of businesses are not eligible to get an LLC. Large companies like banks and insurance businesses are common examples of companies that are ineligible to operate in this type of business structure.
If you're unsure whether your business can form an LLC, take a look at your state's requirements and federal tax regulations as this will provide you with additional information.
According to the IRS, depending on elections made by the LLC and the number of members, the LLC will be treated as either a corporation, partnership, or part of the LLC's owner's tax return (disregarded entity). Keep this in mind when forming your business.
Pros and Cons of LLC
Here are a few pros and cons of an LLC to consider.
- Limited Liability: An LLC means members aren't personally liable for their company's actions. With that said, your personal assets, such as your home, cars, bank accounts, and investments receive protection from someone like a creditor looking to seek collections from the company.
- Pass-Through Entity: LLCs are pass-through entities, which means the profits of the company go directly to its members without being taxed as a corporation.
- Easy to Start: Compared to other entities, an LLC does not require as much paperwork and startup fees.
- Limits: While being an LLC does provide some protection, your personal assets may not be as protected as you think. Unfortunately, a judge can still rule that your personal assets aren't protected through an action called "piercing the corporate veil".
- Self-Employment Tax: The IRS considers an LLC a partnership when it comes to filing taxes. The government considers partnerships as self-employed businesses. This means that you will be responsible for paying social security and taxes for Medicare.
Who Is an LLC Most Suitable For?
An LLC is a good choice if your business poses a considerable amount of risk. Additionally, an LLC is good for those who have a lot of personal assets and want to provide some protection over them. This can also be a good choice if you're looking for a lower tax rate than what you would receive with a corporation.
What is a Corp?
A Corp, also known as a corporation, is a legal entity that is separate from its owners. As a corporation, you still possess many of the same rights and responsibilities as an individual. A corporation can enter contracts, borrow and loan money, sue and be sued by another person or entity, have employees, own assets, and pay taxes. Even more, corporations typically take the same deductions as a sole proprietorship to determine their taxable income.
It's important to note that most large companies are corporations. Recognizable corporations include Microsoft, McDonald's, Apple, and Amazon. One distinct benefit of a corporation is the ability to conduct business under your name and a separate name. For instance, did you know that Alphabet Inc. does business as Google? Alphabet Inc. is their registered corporation, but Google is the name we've all come to know and love.
To create a corporation, it needs to be incorporated by a group of shareholders who share ownership. These shareholders often have a goal of returning profit to the shareholders. But these shareholders do not accept responsibility in the event the business takes a loss beyond their investment in the company.
To learn more about forming a corporation, you can visit the IRS website here.
Procs and Cons of a Corp
Here are a few pros and cons of a Corp to consider.
- Personal Liability Protection: Compared to other entities, a corporation provides more personal liability protection for the owners.
- Access to Capital: Most corporations sell ownership through publicly-traded stock. This means that it's much easier for corporations to get access to capital through ownership selling.
- Tax Benefits: Some corporations, such as a C-corp are subject to double taxation. However, other corporations, such as S-corp, have tax benefits, depending on income, which can be a great benefit.
- Expensive: While a corporation has many benefits, it can be quite expensive to form the company and maintain it. For this reason, companies will need a plan for startup capital to support business operations and pay for the initial filing.
- Double Taxation: C-corps are subject to something known as double taxation. This means that the business receives taxation at an entity and shareholder level.
- Lengthy Application Process: The process of incorporating your company will take a considerable amount of time. This is due to all of the necessary paperwork to document the company's details.
Who Is a Corporation Most Suitable For?
A corporation is good for those looking for further protection from legal liability. It's also a great choice if you're looking to attract investors to the business for more access to capital.
Learn More About the Difference Between an LLC and Corp
An LLC and Corp can both be great options to start your business venture. Ultimately, which business structure you choose will depend on what your business goals are and which structure will provide you with the most favorable and sustainable outcome.
Keep in mind that your business structure will have a huge influence on your company, such as daily business operations, taxes, and how much of your personal assets will be at risk. If you would like to start a business in the United States, contact a professional to start the opening procedures.