When deciding what business structure is best for your new business, liability is one of the most important aspects in making that decision.
After making the decision to start your business, you should keep in mind that legal liability is when a person or company is liable for potential injuries or financial harm to others, and it can result in hefty fines and penalties.
Limited Liability Companies
An LLC is a type of business structure in which its owners are not personally liable for the business’s liabilities except for their personal investment in the company.
The idea is for the company to carry the liability, if necessary, to satisfy debts and shield owners’ personal assets. There are exceptions, such as when an owner mixes business assets with personal ones.
In an LLC, you are not personally liable if you keep your personal assets separate from the business’s assets and the company’s business owners share the profits, which are personal income for income tax purposes.
This means that:
- Business owners pay taxes on company profits as part of their personal income.
- Business owners can write off company losses on their individual taxes.
Corporations
A corporation is an entity made up of shareholders, officers and directors.
In the same way as LLC business owners, shareholders are not personally liable for business debts so long as they do not mix personal and business assets. This is critical in protecting a company’s shareholders from liability.
Owners of corporations are taxed twice. First, they pay corporate income tax, and then personal income tax from any gains from company dividends. Unlike members of an LLC, shareholders in a corporation cannot write off corporate losses on their personal income taxes.
Differences between the two
Starting a business is an exciting and busy time and there are many things you should consider when you are building your business. LLCs and Corporations are just two different forms of business entities. When deciding which business entity is more beneficial for you, consider the specific needs of your business, its size, your company’s long-term goals, and what you can financially take on.