When a person in Virginia is forming a business, they have a number of choices as to how to structure their company. Of course, they could simply head out on their own as a sole proprietorship, but other options include a limited liability company or a corporation.
Some small business owners feel that an LLC is a good fit for them. It offers flexibility and simplicity when compared to a corporation. An LLC also shields the company from the issue of double taxation, which could crop up if a company is a corporation that owns assets that appreciate in value. If that is the case, then the corporation is taxed on the basis of its increased value if the corporation liquidates, but so too are the shareholders of the corporation. When a person owns an LLC, the LLC’s taxes “pass through” to those who own the LLC, so the LLC itself is not taxed on its appreciation in value.
That being said, LLCs often are most successful if there aren’t that many owners controlling the operations of the company. Should a company get enough investors, those investors will inevitably desire some modicum of ownership in the company — that is, stocks. However, stocks can only be issued by corporations. If a shareholder is also employed by the corporation, then that person can be paid a salary and enjoy other fringe benefits that come with employment. Also, depending on the circumstances, corporations may be able to deduct health insurance costs from its total profits, and the health insurance will not be counted as income paid to the corporation’s employees. This can help with employee retention.
As this shows, there are pluses and minuses to both LLCs and corporations. In the end, it is important for those who are forming a business to do their homework and research their various options. If they have any questions about this or other business law issues, they may want to seek the advice of an attorney.
Source: FindLaw, “Corporation versus LLC,” accessed Nov. 6, 2017