As part of the process of forming a company, small business owners must decide upon the structure they want their company to be formed as. Two of the most common structures, particularly in Texas, that owners opt for are limited liability companies (LLCs) and corporations.
Given the importance of small businesses to the American economy (they employ over 47% of the private workforce), it is vital for small businesses to understand these two structures. Thus, this article will explore some of the associated advantages and disadvantages of these two entity types as well as the optimal times to lean towards one or the other.
There is an area in which LLCs and corporations overlap, and they share the same characteristics. The most clear example of this is the protection they both extend to personal assets (aka limited liability protection). This ensures that the personal assets of a business owner are protected if their business is sued by the nature of the LLC and corporation entity’s structure.
Furthermore, another shared characteristic is the exclusivity LLCs and corporations provide their owners with for the name of the business. This luxury is not afforded to businesses structured as sole proprietorships or general partnerships, so they are unable to stop other companies from taking their name.
Easier to Form
For the most part, it will be quicker for a new business to form as an LLC than as a corporation. This is for a number of reasons, namely the fact that the prospective business owner is not required to provide as much information in order to form an LLC than a corporation. There are also fewer steps too.
As an illustration, corporations are obligated to draft bylaws, nominate board members and hold board meetings, as well as distribute stock, whereas LLCs are not required to do any of this.
A key reason to choose LLCs over corporations is the increased flexibility of the former; owners have much more control over how they want to run their business whilst corporations are frustratingly restricted by a number of regulations. Some areas in which this flexibility will be felt most are the business management structure and ownership responsibility options that corporations, put simply, just don’t have.
The flexibility of LLCs also extends to taxation, and the ability of this business structure to choose the way in which they want to be taxed. Standard LLCs are subject to pass-through taxation, though they can also opt to be taxed in an analogous way to corporations (either as a C or S corp).
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There are some advantages to forming as a corporation too. Firstly, LLCs can struggle to attract investment and venture capital from third parties due to the fact that they cannot supply stock, which investors and venture capitalists generally both prefer. Thus, for those aiming to draw in some investment or capital, it is preferable to form as a corporation.
Another important reasons some companies prefer the corporation business structure is its antiquity. The corporation (as a business structure) is hundreds of years old, meaning such businesses get to benefit from legalities that are more established, which is not the case for the much more modern LLC structure.
All things considered, it’s understandable why one might be confused as to the difference between LLCs and corporations due to the number of similarities that they share. That being said, they also have a number of key differences that mark out advantages and disadvantages of both structures.
If you are looking to form your business as either of these, please refer to the following resource for the best options in Texas.