One of the first decisions you must make when starting a business is the type of entity you want your business to be. This is an important decision because each type of entity has its own pros and cons. In North Carolina, generally, the two most popular entity types are the Limited Liability Company (LLC) and the Business Corporation.
Limited Liability Company (LLC)
A limited liability company, or LLC, is a more popular type of entity in North Carolina because, like a corporation, it offers protections to its members, but is treated differently regarding taxation and operations. Specifically, operating your business as an LLC protects you personally, including your personal assets, from some, and sometimes all, liability if the business ever faces legal or financial trouble. However, the LLC provides for “pass-through” taxation, which means that the business’s profits and losses are passed through to the members and reported on their personal individual tax returns. This is a pro for a lot of business owners because if the business experiences losses, they can receive a tax benefit.
LLC’s also have less stringent operational requirements than a corporation. This gives the members more freedom to conduct the business in the way they see best.
One downside to the LLC is that membership interests are generally not transferable. Meaning, if a member wishes to transfer his ownership interest, either by withdrawal, sale, assignment, etc., this will often be disallowed and result in immediate dissolution of the LLC.
Corporation
A corporation is a separate legal entity from its owners, referred to as the “stockholders” or “shareholders,” where, like an LLC, the shareholders are protected from personal liability on corporate debts.
The main difference between an LLC and a corporation is in how the entities are taxed. Unlike the LLC, which is taxed as a pass-through entity, a corporation is taxed as a separate entity from its shareholders, where the corporation must complete a separate tax form. Many business owners find this to be a significant drawback of operating a corporation as shareholders are taxed at the corporate level as well as individually. An additional level to this is deciding between a S Corporation (S-Corp) or a regular business corporation (C-Corp). Except for its tax characteristics, S-Corps have the same characteristics as C-Corps.
However, if the shareholders choose to leave their profits in the business to use as capital, they won’t be subjected to individual tax liability, whereas members who leave profits left in an LLC are responsible for paying taxes on that amount. This is a pro for many business owners since it allows for much more appealing profit reinvestment.
When choosing how to best set up your business entity for your situation, it is best to consult with a tax professional and a business law attorney you can trust. Mistakes at this planning stage can be costly down the road. Both the LLC and corporation have their pros and cons, which should be carefully considered when deciding which structure will be ultimately best for your business.
Dye Culik PC is a business and franchise law firm located in Charlotte, NC. Our attorneys work with businesses at every level to make sure the business owner and their investment is protected. To schedule a consultation, give us a call at 980.999.3557.