In this video, we will cover the distinctions between two forms of business entity available in Ohio: the Corporation and the Limited Liability Company, commonly referred to as the LLC. Each offers some advantages over the other, and which entity you choose will depend on a variety of different relevant factors.
Before we begin, a quick disclaimer. This video is for informational purposes only and should not be considered legal advice. Before making decisions for your business it is always best to have candid conversation with your attorney about your specific circumstances.
First, let’s look at the LLC.One of the first considerations when choosing an entity is the potential liability of the business owners. In a Limited Liability Company, as you can imagine from of its name, the members have limited liability. This means that as a member, your private assets will not be at risk in the event of losses or for business debts of the company.
The potential management structure of an LLC is very flexible. You can choose to have the company be managed by its members, or instead reserve management of day to day operations to a group of designated managers.
In an LLC, there is great freedom in possibilities for distribution of ownership. An LLC member does not necessarily need to contribute as much financially as each other member to have an equal ownership stake. Ultimately, the Operating Agreement, a contract which governs the structure of the LLC, will provide the rules by which a certain LLC will operate.
In the realm of taxation, LLCs also allow for flexibility. An LLC may choose to be taxed either as a partnership or as a corporation. By default, an LLC is taxed as a “pass-through” entity, meaning that any profits the business makes are passed through to the members. These profits will be reported on the individual member’s tax return, allowing for simplicity in filing. Also, the company’s operating costs and losses can be deducted on personal tax returns, which can work to offset other income.
Lastly, LLCs prove to be easier to maintain than corporations, since there aren’t any annual meeting or reporting requirements.
That brings us to the subject of corporations, which are a more complicated entity structure, but offer some advantages for businesses aiming for large-scale growth. Like LLCs, shareholders in a corporation will have limited personal liability for business debts.
Many formal corporate requirements exist in the law. For example, they must hold annual shareholder meetings, and file an annual report with the Ohio Secretary of State. The management structure of a corporation must follow strict guidelines, with a designated Board of Directors handling management responsibilities, and officers handling the day-to-day operation.
The corporate ownership structure also differs. Corporations exist separately from their owners, and can issue shares of stock to those owners, known as shareholders. It is this ownership structure that makes the corporation the entity of choice when seeking to attract outside investors to grow the business on a larger scale.
Unlike LLCs, Corporations are taxed separately. They must pay tax on their profits and tax on any dividends that the corporation distributes to shareholders. Corporations currently pay a flat tax of 21% on their profits, which is lower than the top five individual tax rates. Further, dividends are not tax deductible – meaning they are taxed twice.
Note that taxation is often considered a drawback of a corporation, due to potential double taxation. There are, however, deductions available specifically to corporations which may ultimately work to offset this taxation. Corporations may deduct business expenses, including operating expenses, advertising costs, and employee retirement and medical plans.
Alternatively, if you’re interested in the pass-through taxation offered by an LLC, your corporation has the option to file an S-corporation election. Under S-corp tax status, the corporation is allowed to be treated as a pass-through entity akin to an LLC. I will cover S-corp status in a future episode.
If you have any further questions about corporations or LLC’s please contact a Carlile Patchen & Murphy business attorney, we would be happy to help.