You may already know the several types of business structures that are applicable to your domain investing business. These are sole proprietorship, partnership, limited liability partnership (LLP), limited liability company (LLC), and corporation.
In this article, we will be discussing two of these business formations. LLCs and corporations are the most considered structures of business owners. What is the difference between a corporation and an LLC?
To better help you in deciding which is more apt for your domain business, let us define LLC and corporation, and identify their advantages and disadvantages.
What is a Limited Liability Company (LLC)?
A limited liability company is a type of business structure that protects its owners from the company’s liabilities or debts. Thus, the name limited liability. Owners of a limited liability company are called members. Members create an operating agreement that defines each member’s share or percentage of the business.
The management structure is also stated in this agreement. Since a member can be an individual, a corporation, or another LLC, the process of having a new or a withdrawing member is also defined in the agreement.
LLC Management
In terms of management structure, members of an LLC can directly manage the business if they wish to. They can also appoint a manager or managers to run the business, with other members acting as investors. They basically have the freedom to choose the management structure that would fit their business.
LLC Tax implications
In this type of business structure, the company is not treated as a single entity. Instead, members are seen as “pass-through” entities. The LLC does not pay the business income tax. Income and losses are passed through the members. For tax purposes, an LLC with a single owner is automatically treated as a sole proprietorship, and an LLC with two or more owners is treated as a partnership.
For this reason, members pay self-employment tax and personal income tax based on their percentage share of the income. However, an LLC can also be elected to be a corporation if it meets the qualifications of the state. States may vary in their regulations in classifying a business as an LLC. Some may require payment of a franchise tax.
Legal Requirements and Liabilities of an LLC
As mentioned above, depending on the state your business is in, regulations differ in forming an LLC. It is best to check the requirements needed by your state for your business to be classified as a limited liability company.
Even so, most states require LLCs to submit a statement of information (SOI) or annual report to keep their business information updated in state files. Members of an LLC are not personally liable for the debts incurred by the business. Their personal accounts and assets are considered separate from the business.
Advantages of an LLC
- Limited liability: Members are not personally liable for business obligations and debts.
- Allocation of profit and losses: There is a flexible granting of a percentage share of business income and losses to its members.
- No Double Taxation: It is not subject to business income tax. Members are pass-through entities that pay personal income tax, depending on their profit share in the business.
- Flexible Management: Management structure is not limited to a strict format. Members or their appointed managers can run the business on their own.
- Easy to Maintain: LLCs have fewer state requirements than other business structures. Payment of filing fees and submission of articles of organizations are needed to form one. It is not required to hold annual meetings or submit business owners’ information. A statement of information (SOI) is submitted to update the business profile, either annually or for a period of certain years, depending on state regulations.
Disadvantages of an LLC
- Self-employment Tax: Although double taxation is prevented in LLCs by not having to pay business income tax, members must pay both personal income tax and self-employment tax.
- Transfer of Ownership: Unlike corporations, transfer of ownership in an LLC should be agreed upon by each member of the LLC. Additionally, adding new members to the LLC should also be discussed among others, and is subject to their approval.
- Sudden Dissolution: Some states dissolve a limited liability company if one of its members decides to depart from the business. If the remaining members want to continue with the business, they must form a new LLC.
What is a Corporation?
A corporation is a business form that separates the owners from the business itself. A corporation is considered by law to be a single entity. It means that the business itself enters transactions and pays taxes under its name.
Borrowing money is also done under the business name. Owners of a corporation are called shareholders. A corporation has two classifications: C corporation and S Corporation.
The default type of corporation is a C corporation. C Corporations can have an unlimited number of shareholders, from individuals to other corporations.
On the other hand, an S corporation is limited to 100 shareholders only, and cannot have other corporations or foreign individuals as shareholders.
Corporate Management
Corporations elect a board of directors, who oversee the business, and managers or officers, who are in charge of daily activities. They are also required to have an annual shareholders meeting.
It is important for a business of any form to have detailed reports and files regarding business, but it is more important for corporations to have them and keep them updated for submission to the state.
Corporate Tax Implications
Although both C corporations and S corporations provide limited liability to shareholders, tax payments differ depending on the classification. C corporations pay the business income tax under its name, which is 21% of the income. Shareholders of this type of corporation also pay for the after-income tax in their personal tax returns. This is what is referred to as double taxation.
However, in S corporations, the business is not subject to corporate income tax. Shareholders pay self-employment tax, and personal income tax based on their percentage share of the business income. Then again, when they declare themselves employees of the company and tax is regularly deducted from their salaries, no self-employment tax will be paid.
Legal Requirements and Liabilities of a Corporation
As discussed, a corporation is considered to be a single entity. It is treated as an individual with rights and responsibilities. Therefore, liabilities, such as debts, are not passed through to shareholders. Other legal requirements include annual shareholders’ meetings, corporate minutes, bookkeeping reports, registration, and licensing.
Advantages of a Corporation
- Limited Liability: Profits and losses are not passed through to shareholders. A corporation is treated as an individual entity that deals with transactions and taxes under its business name. The assets and accounts of shareholders are protected in the event that the business incurs debts and other liabilities.
- Accessible Source of Capital: If the business needs more funding, a corporation can easily sell stocks through public trading.
- Easy Transfer of Ownership: Transfer of ownership can easily be done by transferring the share of stocks to another shareholder.
- Perpetual Life: Unlike an LLC, where the business can be dissolved when a member decides to leave, a corporation can exist as long as it is not liquidated. The easy transfer or selling of shares to another shareholder can extend the life of the business to future generations of owners.
Disadvantages of a Corporation
- Double Taxation: Unless the business is elected to an S corporation, corporations pay for corporate income tax, and income passed through to shareholders is also taxed through their personal income tax returns
- Costly: Maintaining a corporation can be expensive. Most states require corporations to pay franchise fees and higher taxes are commonly imposed on corporations.
- Formalities and Strict Measures: There is a more formal and stricter federal oversight of corporations. Annual shareholders’ meetings are required. Various paperwork, such as annual reports and corporate minutes, is done to maintain your corporate status. A corporation must also have bylaws and a board of directors in its management structure.
- Independent Management: A corporation has a management team that supervises the daily operations of the business. Shareholders are usually treated as investors and do not directly oversee the business.
Summary
To sum it all up, both an LLC and a corporation provide limited personal liability to their owners. If you want to be more hands-on with your domain investing business, and managing its operations, you can opt for a limited liability company.
Nonetheless, if your domain investing business is already a big and established company, a corporation may help boost your brand professionalism and credibility. If you intend your business to go public, then the source of funds is more accessible for a corporation.
Still, if you are starting small and decide to make your domain business to be an LLC, you also have the option to elect it as a corporation when you want to.
It is best to weigh all the pros and cons of forming and maintaining a limited liability company and a corporation. Consider the important factors within your domain investing business, like finances, management structure, goals, and vision. Advice from professional experts, such as a financial or a tax advisor, is also helpful in choosing the most suitable structure for your domain investing business.