LLC vs Corporation – Why LLCs Win (Most of the Time)

One of the neatest things about LLCs is their ability to adopt whatever tax classification fits the business model the best. No other business structure can do this. It’s why I like using LLCs over Corporations.

A lot of people think that LLCs should only be used for businesses like real estate. But that’s just not so. If you have an LLC that provides a service or sells a product, you can definitely use it just like you would use a Corporation. You just need to take an extra step, and let the IRS know how you want the LLC to be taxed.

When LLCs first hit the U.S. back in the early 70s, no-one quite knew what to make of them. The structure had been used in Europe, but the concept was brand new to the American market. Now, LLCs probably make up more new business starts than any other kind of structure. In Nevada, for example – one of the states that is a corporate formation hub – LLCs are being created at a rate of about 2 to 1 over Corporations.

But it’s not just the ability to choose your taxation that makes me warm towards LLCs. The other difference is the increased liability protection LLCs provide.

All incorporated businesses give you basic protection from personal liability for the acts and debts of the business, that is unless you specifically do something to change that, like signing a personal guarantee over a business debt. So from that side, there’s no big difference between LLCs and Corporations.

But when you look at it the other way, there is a difference. If you get sued personally, your shares in a Corporation are considered an asset that can be seized by a creditor. They are treated the same as your car, boat, savings account, etc. However, your ownership interests (the LLC version of shares) in an LLC are NOT usually considered an asset that can be seized.

Why is this important? Because, what happens if someone takes control over all your shares in your Corporation and then votes to liquidate it, sell off the assets and shut it down? Or decides to sell your client list to a competitor? Ouch! But in an LLC, it’s different. Because a creditor can’t take control over your ownership, they can’t impact the assets inside your LLC, either. You may still wind up with a judgment against you, and a debt to pay, but at least you’ve got your LLC and its assets intact. You can make the decision on what to do next, NOT a creditor who doesn’t have your best interests at heart.

So that’s why I like LLCs over Corporations, about 98% of the time, anyway. There are a couple of times when you’ll need a Corporation at the end of the day … but not many.

Want to learn more? Check out our store for products like our Operation Guides series. Each Operation Guide comes with tons of information and samples of forms you can use, including Operating Agreements for all sorts of situations.

There are many variables when you’re structuring a business. That’s why it’s hard to go through a quick-service website. Unless you talk to someone who’s got some knowledge and experience on both the tax and the legal side, it’s hard to know what you don’t know. And that can leave you vulnerable.

Got questions? Contact us! We’re here for you.

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