Before establishing a business, you need to know what type of legal structure you want for it. There are four legal business structures that you can opt for your business. It includes sole proprietorship, partnership, LLC, and corporation. Sole proprietorship and partnership are simple and easy to understand business structures but let’s have a deeper understanding of this LLC vs corporation comparison.
What Is Limited Liability Company?
LLC is an amalgamation of both corporation and partnership and hence has benefits of both structures. In LLC, the taxes and profits of the business pass-through to the owners. Therefore, profits and losses are applicable to the owners’ individual tax returns, not at the business level. This makes filing taxes even simpler for LLC owners.
What Are Corporations and How They Function?
On the other hand, corporations are legal entities that are separate from their owners. It can make profits, be taxed, and is legally liable. Therefore, corporations pay taxes on their profits, which is called a corporate tax.
Moreover, corporations can also distribute tax to its shareholders, which is called the dividend tax. However, the dividends are taxed twice, and this is referred to as double taxation. If you are both the employee and owner of your corporation, it will not be an issue for you. Instead, you will receive tax-deductible salaries and bonuses.
Requirements for Establishing A Corporation
Corporate business is a great idea and encourage you to limit your personal liability for business obligations. It is even favorable if you have a lot of outside contracts. Moreover, you can easily transfer ownership to another person.
So, if you’re planning to sell your business or want to attract foreign investors, corporate business is a great option for you. In addition, unlike a partnership and a sole proprietorship, a corporation continues to exist even beyond the lives of its founders. The following are some of the primary and basic requirements that you need to know before creating a corporate business.
Your Business Name
Finding an appropriate name for your business is a tricky and important task. However, the rules regarding the business names vary in a different state to state, but most of them follow these general guidelines:
- It should be different and unique.
- Your business name should not have any obscene words such as “bank” in it.
- Your business name must end with “Company,” Incorporation, or “Corporation.” You can also use an abbreviation for these words.
Physical Address in State of Formation
You should have an appropriate office to provide the address to receives paper-mail. You can also use a P.O. Box as your business address. You should have a valid and approved physical address of your corporation.
Moreover, you have to mention the accurate street address within the state in the articles of incorporation. Not only this, but you also need to mention registered agents who will be available at that location to receive all the legal documents, lawsuits, and notices on behalf of the corporation.
Anyone who has an age above 18 and an official resident of the state where you have your business in operation can be the registered agent for your corporation. However, in most states, the location of your business can serve as the registered office. If you don’t have an office in the state where you incorporate or prefer to have someone else act as an agent for you, you can hire a registered professional agent.
You have to mention the names of some of your decision-makers in the articles of incorporation. It includes both the directors as well as the incorporators.
You’ll typically need to mention the number of stocks shares your corporation is authorized to issue. For this, you will not have to list the names of the shareholders in the article of incorporation.
However, you will have to mention the names of the shareholders in the internal corporate records, together with the number of stock shares issued to each of them.
Once you have this basic understanding and information, you’re ready to get started on forming your corporation. However, you will also need bylaws to guide you throughout about how a corporation operates.
Requirements for LLC
Corporation LLC has become the most popular legal structure for small businesses in recent years. It offers personal liability protection and flexibility. The exact requirements regarding the LLC vary in different states.
For instance, if you have your business in Delaware LLC requirements would be different from thatof Hawaii.
However, the following are some basic requirements regardless of the state you live in.
Choose A Suitable Name for Your Business
It is essential to find a name for your business that complies with your state’s rules for the LLC name search. You can choose any word as the main part of the business name, but similar to corporation name rules, it must also not have prohibited words.
Obtain LLC Articles of Organization Form
LLC formation requiresyou to obtain a copy of the organization’s form of the state in which you have the business. You can get the organization form online from the state’s Secretary office or website. Depending on the state, you might have to post a notice of this in the newspaper.
Fill Out the Articles of Organization Form
After getting the form, you have to fill it and provide information regarding the registered agent’s business name, purpose, office address, and details. However, you do not have to mention the management structure or ownership distribution. You only have to mention the names of the LLC’s members.
Publish A Notice in Your Local Newspaper
Once you are have filled up the form, you have to publish a notice in a local newspaper describing your intention to create an LLC. However, this requirement may be a compulsion in some states and not in others.
Submit Your Articles of Organization Form
It is obvious that after filling the form and giving its ad in the local newspaper of the state, you will submit the document to your Secretary of State. This document must be submitted along with the filing fee, which ranges from $40 to $900, depending on the state. (https://www.thebalancesmb.com/how-to-set-up-a-limited-liability-company-llc-1200859).
The LLC Operating Agreement
The state does not generally require the operating agreement. However, you can create this agreement after the legal filings are done. If you are the LLC’s sole owner, you may not need a single member LLC operating agreement. However, if you have even just one partner, it is best for you to make a written agreement of the terms.
You have to ensure that your operating agreement spells out the management rights and financial responsibilities properly. For instance, make it clear in the agreement that who will contribute if the LLC needs additional capital, under what terms members can leave, and how profits will be distributed.
Set Up Your LLC In the Same State You Have Your Business In
After all the legal obligations, it is also important to make sure that you establish your LLC in the same state you have your business in operation. Unless you have a compelling reason; otherwise, it’s the best decision for businesses to set up in the same state in which it plans to do the business. If you want to observe significant advantages, setting up LLC in one of the tax-friendly states is a great option.
This is the basic knowledge that you will require before starting LLC or corporate business. After knowing the basics, it will be easy for you to manage your business’s legal structure set up.