When you are starting a business in the United States, you have a number of different possible business structures which you can use. Two of your choices are an LLC, which stands for "Limited Liability Company," although it is often incorrectly referred to as a Limited Liability Corporation and a corporation. Both an LLC and a corporation provide some important benefits for business owners over partnerships or sole proprietorship. However, there are several key differences.
Both an LLC and a corporation have one main feature in common which makes them attractive to business owners: they allow for protection from liability for the owners. In a sole proprietorship and a partnership, the business and the owner or partners are considered to essentially be the same single legal entity. If someone sues the sole proprietorship or the partnership, they are in effect suing the owners and the owners personal assets can be at risk. The same is true if the business acquires bad debts. Not liable for debts With an LLC and a corporation, the owners cannot be personally held liable for the businesses litigation problems or for the businesses debts. They are separate in the eyes of the law, with the LLC and the corporation existing as their own individual entities. Paperwork needed The other similarity between an LLC and a corporation is that some paperwork is required to start each one, unlike with a sole proprietorship. The exact guidelines vary by state. However, you will need to submit to the appropriate government entity either incorporation papers or documents indicating your intention to form an LLC.
In a LLC, earnings and losses are passed through taxation to the owners There are several key differences between corporation and an LLC. However, the main and most important difference is that an LLC allows for pass through taxation. This means that when an LLC earns money or loses money, those losses or earnings can be passed directly on to the owners. The LLC is not taxed separately. Tax is paid by the corporation In a corporation, on the other hand, the corporation itself pays taxes on income and profits. This can result in significantly more tax liability for some corporations, since the corporation is taxed on profits and the money is taxed again when it is paid out to owners of the corporation.