There are several business structures available and many business owners have trouble choosing the right structure for their business. This article should help you understand the difference between a Corporation and a Limited Liability Company (LLC), as well as, why operating as an LLC might be best for you.
Personal Asset Protection
If you are in business for yourself, there are many good reasons to form an LLC or corporation. But, perhaps the most frequent reason why business owners choose to operate as either a corporation or LLC is personal asset protection.
If you are operating as a sole proprietorship or general partnership and someone brings a successful lawsuit against you, your personal assets may be at risk. In the worst case scenario, you could lose everything to a successful lawsuit against your company.
But, properly operating and managing your company as a corporation or LLC will be like having a wall between your business activities and your personal property. Your personal assets will be considered separate from your business activities and beyond the reach of your business liabilities.
Corporation vs. LLC
Most business owners, although familiar with the terms, are not clear on the difference between a corporation and all LLC. In fact, many believe that an LLC is simply a specific type of corporation. But this is not the case.
Although corporations and LLCs share some fundamental aspects, they are two distinct types of business entity structures. Here is a brief overview of the two most important similarities and differences between LLCs and corporations:
- How Corporations and LLCs are Alike
Both corporations and LLCs are great ways to build a wall between your personal assets and your business liabilities. Both structures provide their owners and shareholders with limited liability for the debts and obligations of the business. This is protection you cannot get as a sole proprietorship or general partnership and that helps to protect your personal assets in the event that someone sues your company.
- How Corporations and LLCs are Different
Business Requirements - a corporation must have a board of directors and shareholders and must hold annual meetings and record minutes. An LLC, on the other hand, doesn't have the same formal requirements. Nor are there any annual meetings or minute books required. In fact, you can form an LLC with only a single member, making it ideal for many small to medium-sized businesses.
- Taxation - corporations pay taxes on profits generated by the business at the corporate tax rate. Then these profits are taxed again as personal income tax when they are distributed to the shareholders as dividends. This creates a situation referred to as "double taxation", meaning that business profits are taxed twice.
- On the other hand, an LLC does not pay taxes on its business profits. Instead, profits and losses are passed through to the LLC's owners (called members), to be reported on their personal tax returns (in the same way that taxes are reported for a general partnership), thereby avoiding double taxation.
Why Choose an LLC?
An LLC business structure can be considered an alternative to a corporate business structure. One that combines the corporate advantage of limited liability with the partnership advantage of pass-through taxation. An LLC allows business owners to form a legitimate business that combines the asset protection of a corporation with the simplicity of a partnership, making it one of the most popular business entity structures for small businesses in the US.
In addition to the personal asset protection and pass-through tax advantage, the LLC business structure offers a number of other benefits, including:
- No residency requirement - the owners of an LLC don't have to be US citizens or permanent residents.
- Growth Potential - there is no limit to the number of owners/members an LLC can have.
- Credibility - once you have formed an LLC, your company will be looked upon more favorably by potential investors, partners, lenders, and suppliers.
If are you concerned about how your business liabilities could affect your personal assets and want to enjoy the pass-through tax advantage of a general partnership, as well as, enhanced credibility? Then you should consider forming an LLC.
Need Help? Contact an experienced New Mexico Business Law Attorney
When considering different business structures, it is important to look at the benefits and risks of each structure, weigh them against the needs of your business, and choose the structure that fits your business best. This will often require the assistance of an experienced business law attorney who can help you properly assess your business's needs and the obligations you will need to fulfill in order to operate under the chosen business structure.
For more information, or for assistance forming an LLC in New Mexico, contact an experienced New Mexico business law attorney today.