Establishing a small business is a dream most Americans have. One of the first issues is what form of business structure to use. In the old days, it was a partnership vs corporation question. In today’s litigious society where asset protection is a big deal, it’s an LLC vs incorporation question.
By the way, LLC does not stand for Limited Liability Corporation, as many people think. It is a Limited Liability Company. It’s the old Ltd. in England or the GmbH in Germany reincarnated in the United States.
Since their introduction in 1977, Limited Liability Companies (LLCs) have become more and more popular. The decision of forming an LLC vs incorporating is coming down today in favor of the LLC. Why?
Asset Protection LLC vs Inc.
Generally, the asset protection of an LLC and a corporation is the same, at least as far as the “corporate shield” is concerned. The corporate shield protects the shareholders, officers and directors from the acts of the company.
In either the case, the LLC versus incorporation asset protection shield, aka, corporate shield should form a barrier between the company and its members and managers.
Note that the language in the LLC vs inc. world is different. Here are a few of the term differences.
Corporate vs LLC Terminology
|Articles of Incorporation||Articles of Organization|
|By Laws||Operating Agreement|
In your struggle to make the incorporate vs LLC decision, you need to know that the LLC offers a form of asset protection that the corporations don’t offer. The LLC will protect the company (LLC) from your personal liabilities.
It’s called a “charging order” protection. Charging orders are a carryover from the old English laws that tried to protect other partners from the personal acts of one of the partners.
Your lawyer and all the other internet sites never mention charging order protection, but I’ve seen many people lose their business through a divorce, bad personal real estate deficiency judgment, or other personal disaster. I’ve written a full eBook on the extra asset protection you can get out of the LLC. It’s called How to Double Your Asset Protection.
This is important stuff, and it should weigh in heavily on your decisions about incorporating versus LLC structure formation. After all, you’re setting up your business entity structure for the asset protection.
Taxes LLC vs Inc.
Taxes are not really a valid decision point in your LLC versus Inc. decisions. The question I always get is about the LLC vs S corp differences, because everybody thinks the LLC is a pass through entity, just like an S corp.
They’re right and they’re wrong. An LLC can be a pass through entity or NOT. It all depends upon how you want your LLC to be taxed. The LLC is set up and then you decide how it is taxed. All LLCs are the same legal structure; they are just taxed under different sections of the IRS Code, depending upon what you choose.
If you can choose how to have your LLC taxed, taxes shouldn’t have any input into the decisions you making in the LLC vs Inc. battle.
Whichever side you come down on in the incorporated vs LLC battle, you need to make sure you maintain your entity structure, or it won’t protect you. If you think you might have made the wrong decision, you can change down the road, but it’s a lot easier to get all the facts up front and make an informed decision.
The problem is you walk into the attorney and say, “Hi. Here I am Mister Attorney. I need a corporation. Set me up.” The attorney is going to incorporate you. There’s no LLC vs incorporation discussion. They want you in and out.
Whether you get the corporation or the LLC, it’s a for sure fact, that you don’t get help with the tax decisions. (How do you want your LLC taxed? How will you make the most money?) You don’t get training on the care and feeding of your entity. The bottom line is the lawyers and the web sites only get you half way there. Just filing the state forms and maybe getting an operating agreement or by laws does not give you the protection you want when you’re standing before the judge.
If you don’t follow the laws, the courts can’t use the laws to protect you. LLC versus Inc. doesn’t matter, if you don’t know the laws, you will never follow them. Somebody has just got to patiently sit you down and teach you what to do.
It’s not hard, but you can’t afford to pay the attorney to do it for you and the internet is only interested in getting you to pay the fee to file the state papers. I want to help you understand these matters and will teach you all you need to know.