When it comes to choosing a legal entity for your business, which entity is right for you Limited Liability Corp (LLC) or a Corporation (Inc)?
Oct 11, 2019
Many individuals ask what legal entity would be best when they are forming their music company? There are a few key differences that may define how you want to move forward. Let’s compare an Limited Liability Corporation (LLC) to a Corporation (Inc.) when it comes to taxation, ownership and compliance requirements.
LLC vs. Incorporation Formation
When you want to form a business that is legally recognizable you must register it with the state that you choose to incorporate it in. When this is done the business becomes a legal entity and is separate from the individuals who founded it.
There are many reasons to forming an LLC or corporation rather than owning the business personally. The benefit of owning either an LLC or Corporation is that as long as you are in compliance with state laws, you have limited exposure for liability. However, neither a corporation nor an LLC will protect you in the event of your own malpractice or intentional wrongdoing.
In addition, having a legal entity increases your credibility with both the music professionals and investors.
Key differences between an LLC and a Corporation is the way they are taxed.
An LLC is a pass-through business entity. Profits and losses of the organization go straight through to the owners. Business income equals personal income, so the owner pays the tax on his or her personal return, and it's taxed at the individual rate. If the business is operating at a deficit that will also be reflected as a deduction from your personal income or wages earned.
There are two kinds of corporations; C corporations and S corporations.
Corporations are treated as a separate taxable entity. Which means the business’ profits and losses are taxed under the corporation, and not the owners. As a result, corporations are taxed at the corporate rate. If the corporation makes a profit it can distribute this to the shareholders. That income is reportable on your personal income tax return. It's a double tax, and can cut into the amount of profits realized.
However, certain corporations qualify as an S corporation. An S corporation is a pass-through tax entity similar to an LLC. However there are several restrictions such as a limit on the number and type of shareholders and classes of stock.
LLC's, are taxed like a sole proprietorship or a partnership.
Ownership and Management
LLC's are run by the member/managers and have a great deal of flexibility. LLC's are set up by the founding members thru the Articles of Organization. The original members can make choices that suit their intent. For instance, if one member of the LLC invests more or is running the business day-to-day the Articles of Organization may allocate to that member a larger share of the profits.
However, a note of caution is the difficulty when a member of the LLC wants to exit or transfer their LLC membership interest. As the consent of the other members of the LLC is required.
Corporations on the other hand are run by officers. These officers are appointed by and answer to the Board of Directors. Corporations are required by law to hold annual shareholder meetings, keep minutes, and records of actions which also include holding director meetings and keeping minutes of these also.
Corporations distribute profits to their shareholders based on the number of shares they own. These shares are easily transferable to others (unless the shareholders have an agreement restricting transfer)—making corporations a good choice for businesses that seek outside investment or are considering a public stock offering. Whereas in a corporation it is easier to sell or transfer shares.
Reminder that both LLCs and corporations are required to maintain records such as; the governing documents, shareholder and member lists, and tax returns. Both entities also must maintain an address in the state it is incorporated in and a registered agent.