Starting a business can give you the opportunity to take control of your own financial situation and set your own schedule. If you’re starting a business, creating a new business entity is usually a good idea. Deciding what type of business entity to set up can be a challenge. Two of the most popular options are the LLC and the corporation. Depending on your situation, one may be better suited for your business than the other.
One reason that you may want to go with an LLC is because it offers simplicity. With a corporation, you have to create articles of incorporation and bylaws when you get started. You also must have shareholders meetings and keep minutes. With the LLC, you don’t have to worry about any of these formalities. You can just run your business as you normally would.
Another difference between these two entities is how they are taxed. With a C corporation, the profit that is generated by the business is taxed once at the corporate level and then the money is also taxed again when it is distributed to shareholders. With an S corporation or an LLC, the profits generated by the company are taxed only once, when they are distributed to the owners of the business.
Setting up a corporation is a little bit more formal than setting up an LLC. While an LLC is a business entity, most lenders will look at your own financial situation when you apply for business credit. For example, if you’re trying to get business credit cards, the credit card company will look at your personal credit history before you can be approved. When you set up a corporation, the lender may still look at your personal credit in some cases, but they may be more likely to focus on your business credit. This makes it possible to get access to the business credit you need.
In addition to regular taxes, you also have to consider the impact of self-employment taxes. With an LLC, you have to pay self-employment taxes on any money that you earn. With an S corporation, you could potentially get out of some of the self-employment taxes. You can pay yourself a modest salary and then take the rest of your money in shareholder distributions. You only have to pay self-employment taxes on the salary and not the distributions.
Contributed by Jenn Lang, a freelance writer specializing in business and technology.