Should You Form Your Business as a Limited Liability Company or a Corporation?

If you’re starting a new business, you might be wondering how to properly form it. And one of the biggest questions is whether a limited liability company or corporation makes the most sense for you. 

Forming your business either as an LLC or corporation each has its own benefits. There are several similarities between the two types of businesses, but also some differences you should know about before choosing to move forward with forming your business. 

At Generations Law Group, we’ve helped Idaho business owners through these problems for decades. Before taking the next step in your business, here’s some information about these types of businesses so you know what to expect.

The main similarity between an LLC and a corporation is that they are both legal business structures. This means that state law oversees the regulations and requirements for maintaining a business of this kind.

Additionally, by forming an LLC or corporation, you limit the liabilities that any one member or entity can sustain legally. This can help protect the personal finances and assets of owners and members of these businesses. While you never expect to face a lawsuit for your business, it’s good to have personal protection from creditors and serious fees associated with company lawsuits. 

For both business formation types, you will also need to be prepared to file paperwork regularly according to your state’s requirements. As part of your business formation, you’ll also need to be prepared to pay the fees associated with the business formation.

An LLC will provide your organization more flexibility than a corporation will, generally speaking.

There are several key differences between an LLC and a corporation that you should know about.

In most places, you’re required to add the word “limited” or “limited liability corporation” to your business name if you’re forming a limited liability corporation.

You could also use abbreviations such as Ltd. or LLC to the end of your business name and still meet the requirements. For a corporation, you need to end your company name with “Inc.” “incorporated” or “corporation.” If you fail to name your company properly, your business applications with the state might get denied because your business is not compliant with the rules.

So be sure that you choose your business formation before naming your company officially.

For an LLC, ownership is divided into units or percentages. Units are similar to stock shares. Our team at Gen Law Group can help you review Idaho’s rules for LLCs to see how many members you can have and how to break down the percent that each member owns.

However, forming a corporation has requirements about percentages of ownership based on the member’s investment in the business. Owners for corporations are considered shareholders or stockholders. You cannot use percentages to describe ownership for a corporation.

With an LLC, you have two options for your management structure: 

1. 1. Member-managed, which means the members oversee the day-to-day management
   2. Manager-managed, which outlines one or two specific persons, who have the authority to make decisions about the business

For manager-managed LLCs, this information will be outlined in the operating agreement as well as formation documents. On the other hand, corporations use officers and a board of directors to manage the business operations and make decisions. Officers answer to the board, and the board of directors answers to the shareholders. LLC members can choose to have their organization managed by officers and a board of directors, as well, if they so choose.

One of the largest and most significant differences between an LLC and a corporation is the tax structures they offer. Standard LLCs that have not filed as a C corporation use pass-through taxation.

The great news about this is that pass-through taxes mean that the company itself does not have to pay taxes before money passes to the LLC owners. Corporations must pay taxes on profits before the shareholders receive any money. This essentially means that money your corporation makes is double-taxed — once by the business, and once for the owners once they are paid their dividends.

Both LLCs and corporations require ongoing paperwork and maintenance to keep their legal status as a business. However, those requirements differ. For LLCs, you’ll likely provide an annual report as part of your annual taxes to keep your legal entity status.

In contrast, corporations must have annual shareholder meetings and board of director meetings to maintain their legal status.

You don’t have to decide between an LLC or a corporation on your own.

Generations Law Group can help you form your business in a way that makes sense for managing your organization’s risks while still optimizing your finances.

To learn more about how we can help, schedule a strategy session with our team.