How does incorporation differ from incorporation, and in turn from a corporation? Entrepreneurs make a choice between these two types of organizations, because both LLC and corporation are characterized by limited liability business.
This means that the founders, shareholders, and directors are not liable with personal assets for the company’s liabilities. If the business runs into trouble, such as creditor claims or tax debts, the executives can only seize corporate assets, while the personal assets of the company owners are separate and protected.
Advantages of Incorporating a Legal Entity
What are the advantages of incorporation for an entrepreneur:
- The ability to engage in activities that are not available to sole proprietors and self-employed (selling alcohol, organizing a private security company, insurance or credit activities, being a stockbroker – each country has different restrictions for sole proprietorships).
- Choice of the optimal tax system.
- The ability to make deals with large customers, because most legal entities do not want to cooperate with private performers or individual entrepreneurs.
- The ability to sell the company in the future – in part or in full.
- Opportunity to scale the business, including entering foreign markets.
- Opportunity to do business together with partners, hire more staff.
- Making tax deductions – deducting certain business expenses from the taxable base and thus reducing the fiscal burden.
Now let’s look at the difference between an LLC and a corporation, and which format is better for an entrepreneur to choose.
Features of LLC – Pros and Cons of Registration
- It is much easier and cheaper to register an LLC than a corporation. Fewer documents are required, fees are lower, and the procedure can almost entirely be done online.
- The sole owner of an LLC can declare income in personal tax reports, report all profits and losses of the company, and optimize the tax burden.
- Co-owners of an LLC are called members, they receive profits and pay taxes not as a legal entity, but as self-employed.
- Ownership of the company’s assets is distributed equally among the members, regardless of their number, which means that LLC co-owners have the same decision-making powers.
- The rules of doing business for LLCs differ from jurisdiction to jurisdiction, which can create inconvenience if the business operates in several regions.
Features of a Corporation – Pros and Cons of Registration
- This is the optimal business structure if the company goes for super profits.
- Founding a corporation is a more complicated and time-consuming process than registering an LLC. The founders must elect a board of directors, hold annual meetings, and prepare public financial statements.
- You can choose one of two types of corporations – C corp or S corp, which differ in taxation mechanisms and thus optimize tax rates.
- A corporation is one of the few business structures that has the right to issue shares, which means the ability to change the composition of shareholders and the board of directors, raise investment capital, and sell shares of the company.
- The co-owners of a corporation who have the right to make decisions are called shareholders, and they receive their share of net income in the form of dividends.
- Ownership and level of influence in a corporation depends on the number of shares each partner owns – the more shares, the more decisions a co-owner makes.
- The corporation form is best suited for creating a non-profit organization, which also includes trusts and asset management companies.
Conclusion
If the business grows to a large scale, the optimal form of operation will be a corporation. These recommendations are not final options, because in any country business can change the organizational and legal structure, depending on the goals, pace of development and plans of the owners. This means that the forms of ownership can change, the founder of a legal entity can be not only a private person, but also another organization. In general, any transformation of entrepreneurial activity is possible, if you adhere to the norms of local legislation and with the support of competent lawyers.
