When you start a new business, one of the first decisions is the type of entity. Most small or medium sized businesses are limited liability companies (“LLC”) or sub-chapter S corporations. Both are designed to limit the liability of their owners. An LLC is owned by members who may manage the company directly or delegate that authority to managers who are responsible for the operation of the business. LLCs are typically taxed as a partnership with no taxation of income at the entity level. LLCs have less governance and formality requirements than corporations. Corporations are owned by shareholders who must elect a board of directors who, in turn, must appoint officers to handle the daily management responsibilities. The elections are performed and documented annually, typically being stored in a corporate record book. When forming a corporation, the default tax treatment is under subchapter C, which requires its income to be taxed at the corporate level. However, qualifying entities may file an election to be taxed under subchapter S, which allows them to avoid income taxation at the corporate level. Shareholders of a corporation can draw a salary from the entity as an employee, which may provide for certain strategic advantages over an LLC, where the members cannot draw a salary as an employee. LLCs and corporations offer different benefits depending on the specific situation, and which one is best for you requires careful consideration of all relevant factors. If you need assistance determining which business entity is best for you, call the Business Law Group and speak to an attorney.
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