Corporation or LLC - the Difference is Clear... or is it?
So you're finally going to start your new business on 1/1/2007, or you have a business and it's time to move into a more formal structure. But what should it be? Corporation or LLC? And what is the difference anyway?
First let me say there's a whole lot of folklore and other useless information floating around on this subject.
Second, I suggest that you speak with your accountant. The most significant differences between a corporation and LLC (at least for the purposes of small businesses) are tax differences.
The best way to think about the difference is to understand why LLCs were invented. As business entities go, they are relative newcomers. And they were created in large part to solve one specific tax problem - the double taxation of the sale of appreciated assets. WHOA!! Say that in English, Nina.
Ok, think real estate investing company. It goes to the boonies and buys up lots of land (an asset) eventually suburbia creeps into the boonies and the land (asset) is now worth a lot more (appreciated asset), so now the company wants to sell the land (Sell of appreciated asset). In a corporation, whether it's a regular C corp or a Subchapter S corp, the corporation will recognize a taxable gain from the sale of the land (the appreciated asset) AND when the individual owners of the corporation take their money out... whoops, they get taxed again. TWO TWO TWO Taxes in One.
But in a partnership, there is only one tax on the sale of appreciated assets. But partnerships have unlimited liability for the owners. So the LLC was created to provide a limited liabilty entity that's taxed just like a partnership. But wait, you say, isn't that what a S Corp is? No, young grasshopper, not really. An S corp is taxed somewhat like a partnership for income and expense purposes, but no not for the purposes of taxing the sale of assets.
For a handy but very over simplified visual of all this (this is NOT tax advice, please see our regular disclaimer - you get what you pay for and you're not paying for this, so take it with a barrel of salt) See This Chart
So back to you and your little business. What to do? Are you going to sell appreciated assets - that doesn't mean you buy wholesale and sell retail. It means you buy or create something worth $10 now and over time it's worth $100. Usually this is real estate, antiques and very significantly certain intellectual property that's sold not licensed. If you're in this business - think LLC. If not - figure out why you want an LLC over a corporation other than because all your friends are doing LLC. Remember, would you jump off a bridge just because all your friends were doing it? (to quote your mom).
Now back to square one - see your CPA.
