When starting your small business, you will need to decide how you want to structure the firm. In general, the owners of small businesses decide on structuring their firms as corporations or LLCs. But the question is – which one can be better for your company?
From neighbours to relatives, everyone tries advising new and inexperienced business owners. While some will tell you to consider forming a corporation, others may tell you to decide on setting up LLC in India. But how can you come out of this dilemma? Well, in order to decide which business entity will work for you, you need to have a clear knowledge of how an LLC differs from a corporation and what are the potential pros and cons of adopting these entities.
Common Differences between LLCs and Corporations
LLCs are set up by a single or multiple business owners. A document known as Articles of Organization has to be filed by the owners for setting up the business. The owners then have to give their consent on the Operating Agreement for making use of it for the proper management of the everyday business operations and deciding on the share of business ownership of each member.
On the contrary, corporations are setup by filing up the corporate organization forms. The corporation has to form a reliable Board of Directors as well. The members present in this group have to administer the operations of the corporation and must agree on the bylaws. The actual owners of corporate business are usually the stockholders who have purchased shares of the company.
LLCs and corporations are taxed differently. Since a corporation is a separate entity, it has to pay taxes at the standard corporate rate. On the other hand, an LLC is taxed on the basis of the total AGI of all the owners of the business.
Business ownership happens to be one of the major factors that can show the difference between a corporation and an LLC more vividly. In general, the owners of the LLCs are individuals, whereas the owners of the corporations are basically the people who invest in shares.
4.Profits and Losses
Speaking generally, the losses and gains of corporations and LLCs are handled in different manners. The gains of corporate businesses are handled by the management of the corporation, whereas the profits of LLCs are handled by individual owners.
The Advantages of Setting up an LLC
- An LLC can give you the flexibility of choosing the way you are taxed. This implies that double taxation can possibly be avoided.
- LLCs usually call for fewer governance necessities.
- An LLC is generally liable to minimal annual fees.
The Disadvantages of Setting up an LLC
- When setting up LLC in India, you may experience difficulty in raising funds from the investors.
The Advantages of Forming a Corporation
- When setting up a corporate business, raising funds from the investors and making a public offering is not very difficult.
- It is a matter of fact that the investors, solicitors, and bankers are more amicable with corporate businesses in comparison to the LLCs.
- The owners of corporate businesses can consider making an offer of stock options for attracting reliable talents and incentivizing employees.
The Disadvantages of Forming a Corporation
- The requirements for corporate governance can prove to be costly as well as time-consuming.
- Unlike the LLCs, corporations can face double taxation in case of distributed dividends.
LLC or Corporation?
From the above discussion, it is quite clear that both LLCs and corporations have their own set of pros and cons. That being said, you must choose your business structure on the basis of the total number of people owning the business, your expansion and investment plans, and your strategy of running the business. In addition to all these, you must also consider the potential taxation of each one when making your choice. You can even go ahead and compare between LLC or corporation yourself and do additional research before selecting your business structure.
If you still have confusion about whether to choose the corporation or the LLC structure for business setup in India, you can easily consult a reliable and experienced business attorney for necessary guidance.