Business structures play a significant role in putting up a business model. These structures may differ slightly from one another. However, these slight differences can be critical factors when you register your company.
Types of Business Structures
One or more businessmen can create a Limited Liability Company (LLC). LLCs are often used for pass-through business models. The losses and profits will be passed on to the owners according to their share in the membership. Each owner or member shall file a document called Articles of Organization to formalize their membership. They will also create an Operating Agreement for the standard operating procedure of the company.
Corporation happens when the shareholders file corporate organization forms. These forms will contain the location and the name of the shareholders and some shares each of these shareholders has. These shareholders will then create a board of directors who will oversee the management of the business model.
Which should I choose— a corporation or an LLC?
For LLC, they have a flexible taxation. The owner or member can choose how their taxes are taxable. LLCs are usually pass-through business models. These business structures undergo single taxation.
Unlike the LLC, Corporations’ taxes are taxable to the profits earned by the company. They are more prone to double taxation because of the individual taxable tax and corporate tax. Individual tax is deducted from the dividends of each shareholder while the corporate tax is 35% of the profit gained by the company.
- Business Ownership
The owners of a corporation are called shareholders. In a company, the shareholders can receive an equal amount of dividends by creating a stock class structure. However, this is only limited to C-Corps. For S-Corps companies with single taxation, they cannot create a stock class structure. S-Corps business models need to have single class stocks. This will determine the amount of dividend that the members will get.
Unlike the corporation, the LLC call all members as owners. LLCs have the complete freedom on how to divide the ownership of the business. Moreover, the members will also decide among themselves how they will divide the dividend annually.
- Business Operation
In a corporate company, the Board of Directors is responsible for handling business management and daily operation. Shareholders are the owners of the corporation, but they are a separate entity from the Board. They are not allowed to make corporate decisions unless they are an elected director or appointed director of the board.
Unlike the corporation, LLC has a more flexible and centralized management structure. The members can decide among themselves who can be the manager. The member can be both the owner and manager.
Before you file your LLC online or submit the corporate forms with the other shareholders, it is best that you seek advice from a CPA or an accountant first. That way, you can determine if LLC or a corporation is the best business structure for your company.