When and How to Start an LLC or Corporation

Most small businesses who run their own business will consider forming an LLC (limited liability company) or corporation at some point. And for good reason, doing so has many benefits.

Here are some things you should know about starting an LLC or corporation.

Which is better?

For starters, most small businesses today will create an LLC and not a corporation. There are many reasons for this, which mostly revolve around how LLCs are easier and cheaper to operate than a corporation. With that said, this is not a universal rule and there may be reasons to form a corporation based on your unique situation.

Limited Liability

Limited liability is one of the biggest reasons to form an LLC or corporation. The concept is pretty simple–the owners of the business will not be liable for the debts and liabilities of the business. Thus, if the LLC breaches a contract, the LLC will be liable but the owner will not be liable unless they signed some kind of guarantee. But be careful, you’ll always be liable for your own wrongful actions.

Taxes

Most LLCs can choose how they want to be taxed.

• Single-Owner LLCs: The default tax status for a single-owner LLC is sole proprietorship. This means you’ll report income or loss on Schedule C to your personal tax return and pay taxes as your individual rate.
• Multi-Owner LLCs: The default tax status for a multi-owner LLC is partnership. This is similar to sole proprietorship taxation in that each owner will pay taxes on their share of the income or losses. Each owner will get a K1 from the LLC and the LLC must file an informational return with the IRS.

Both types of LLCs can elect to be taxed as an S-Corp. Learn more: What’s an S-Corp?

Ability to grow

Another advantage of creating an LLC or corporation is that you can add co-owners. You can have multiple voting owners or a mix of voting and non-voting owners. This makes it easy to share the company’s profits with other people like employees and advisors.

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Related Guides

There’s so much more to learn! Here are a few related guides you should read:

• Sole Proprietors: When and how to operate as a sole proprietor
• DBAs: What is a DBA/Fictitious Name?
• S-Corps: What’s an S-Corp?