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What are the differences between LLCs and corporations?

On Behalf of | Jun 12, 2023 | Business Law

Starting a business in Pennsylvania is an exciting time for many people. It can also be nerve-wracking as there are many aspects of running a business that people need learn when they get started. People may understand the product or service that they are providing and may have clients and customers ready to go. However, there is more to running a business than simply selling a product or service.

One of those other aspects is having a business structure in place to help protect the owners of the business from liability. There are many different business structures people can choose from, but two of the most common types of business structures are limited liability companies (LLCs) and corporations. It is important to know the differences between them though to ensure people choose the right business structure.

Basics of LLCs

LLCs create a separate entity from the owners that protects them from debts and any legal action taken against the owners. These are known as pass-through entities though. This means that the profits and losses pass to the owners for tax purposes. Instead of filing a tax return for the business, the business income is reported on the owners individual tax returns. The owners are considered self-employed though and will have to pay the self-employment taxes.

Basics of corporations

Corporations can be set up as a C-corporation or S-corporation. Both are separate entities protecting the owners from liability. One difference from an LLC though is that the owners of the company are shareholders. If it is set up as a C-corporation, the company will file a separate corporate tax return for the company. The owners are considered employees and will only report their income and dividends on their individual tax return instead. Since they are employees though the company will pay the payroll taxes.

Business owners in Pennsylvania may not be experts in every single aspect of running business. Often times the legal side of the business is not something they understand completely. However, it is still a very important part of running a business and one they need to do properly.