Deciding between an LLC and a Corporation
If you are thinking about starting a business in DuPage County, it is important to understand the differences between forming an LLC and a corporation. Generally speaking, both of these business structures have the benefit of reducing an individual business owner’s liability in the event of a lawsuit or bankruptcy, for instance. However, these business structures are taxed very differently, and those tax differences can make a big difference in the long run. In addition, there are distinct types of corporations — namely, C corporations and S corporations — and the type you choose can have very different results in the long run.
It is important for members of the Muslim community in DuPage County to understand some of the distinctions between various business structures before launching a new enterprise. Once you have a sense of the pros and cons of each, you should always speak with an experienced business litigation attorney in Oakbrook Terrace. One of the dedicated lawyers at Farooqi & Husain Law Office can analyze your situation and discuss your options with you today.
Differences between an LLC and a C Corporation
To better understand the tax implications for an LLC versus a corporation, we will assume that you are thinking about a C corporation, or a “C corp” as it is more commonly known. Often, the most important distinctions for a business owner when it comes to an LLC and a C Corp concerns how these business structures are taxed.
First, if you are considering starting a new business in DuPage County, you should know that if you do not decide between an LLC or a corporation, your business will fall into one of two categories: 1) a general partnership (in which you can have multiple owners), or 2) a sole proprietorship (in which you have only one owner). In both of these scenarios — without forming an LLC or a corporation, you can expose yourself as a personal individual to business liability. As such, you will likely want to form an LLC or a corporation. Now, some key tax-related distinctions:
- An LLC does not pay income taxes based on its profits, which makes it a “pass-through entity.” Instead, “any profits or loss are passed through to the owners . . . and reported on their personal tax returns.” Differently, a C corp has to provide a business tax return and must pay income taxes on any profits it makes. As such, C corps sometimes can be at risk of double taxation, a situation in which both the business and its owners pay taxes on profits or dividends;
- C corp owners have more flexibility when it comes to leaving money in the company. In other words, C corp owners are only taxed personally on dividends they receive. As such, C corp owners can leave profits in the business, taking a smaller personal salary, in order to fall into a lower income-tax bracket. LLC owners cannot do this;
- LLC owners can deduct certain business losses on individual tax returns, while C corp owners cannot; and
- LLC members pay taxes on certain benefits (such as retirement plans, health plans, and life insurance), while C corp owners often do not have to pay such taxes.
It is important to recognize that there are distinctions between C corporations and S corporations, and in many of the scenarios discussed above, S corporations — also known as “S corps” — function more like LLCs. You should discuss with an attorney which kind of business structure is right for you.
Contact a Business Lawyer in DuPage County
At Farooqi & Husain Law Office, we are committed to assisting members of the Muslim community with questions and concerns about launching a business. If you are not sure which type of business structure is best for your needs, it is important to discuss your situation with an experienced DuPage County business lawyer. An advocate at our firm can speak with you today. Contact Farooqi & Husain Law Office for more information about our services.