When beginning a new business, choosing an entity type is one of your first decisions. Most businesses prefer to establish a Corporation or a Limited Liability Company (LLC). The primary distinction between an LLC and a corporation is that one or more persons control an LLC, whereas a corporation is owned by its shareholders. It is true that regardless of whatever organization you pick, both provide significant benefits to your company. However, it serves one well to understand the differences.
Chart Summary
| LLC | CORPORATION |
| Tax deductible fringe benefits |
| Ownership is represented by stock |
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Definition
Limited liability is a sort of asset protection for individuals. It guarantees that your liability for the debts and liabilities of the firm is limited to the amount of money you put into the business. This prevents your house, autos, and other personal assets from being utilized to pay off corporate debts.
Your house might be taken as collateral to settle the business’s debt following a lawsuit or bankruptcy if you do not have limited liability protection. This is one of the most significant benefits of incorporating a company corporation.
A corporation is a legal body recognized by the state as distinct from its owners (also known as shareholders). Individuals and other entities can own a company, and ownership is easily transferred through the purchase and sale of shares.
LLC vs. Corporation
By default, an LLC is taxed as a pass-through entity. This means that the company’s profits are “passed through” to the owners (called members). Profits and losses are recorded on the owners’ tax returns, not on the firm level. As a result, filing taxes for LLC owners are frequently simplified. Corporations are taxed as distinct legal entities that can generate their revenue. Corporations must pay tax on their earnings (corporate tax) and tax on dividends sent to shareholders. Dividends are taxed twice since they are not tax deductible (unlike salaries and bonuses). This is known as double taxation.
Corporations are taxed as distinct legal entities that can generate their revenue. Corporations must pay tax on their earnings (corporate tax) and tax on dividends sent to shareholders. Dividends are taxed twice since they are not tax deductible (unlike salaries and bonuses). This is known as double taxation. This is not an issue for small businesses if only the proprietors work for the company.