5 Myths about LLC's and Corporations

As I have mentioned before, I get lots of questions about LLC's and corporations, and some of them reveal basic misunderstandings about these business entities. For example, here are a few of the common myths about LLC and Corporation types of legal entities:

• Myth 1: An LLC is a "limited liability corporation" and is the same as any other type of corporation.
  An LLC is a "limited liability company." It is not a corporation. A corporation is separate from its owners and shareholders and is taxed in a different way. An LLC is a pass-through entity, passing the profits and losses through to its members. An LLC is formed with Articles of Organization, while a corporation is formed with Articles of Incorporation. While the two forms are similar in some ways, they are not equivalent.
  
  
• Myth 2: I can set up my LLC or corporation in a state like Nevada and avoid paying income taxes.
  It is true that corporations in Nevada don't pay income tax, but you can't just set up a corporation in any state. You have to have a business "presence" there, and you have to be doing business there. While you might save on corporate income tax, you will pay to keep up the business entity in that state. Why not just play it straight and incorporate in the state or states where you are doing most of your business? Being tricky usually costs you more in the long run.
  
  
• Myth 3: I can do a Sub-chapter S Election any time after I form my corporation
  You can't do a Subchapter S election any time. If you are starting the corporation, you must do it within two months and 15 days from the formation of the corporation. Or you will have to wait until the appropriate time for any tax year: no more than to months and 15 days after the beginning of a tax year, to get the Sub-S status for that tax year.
  
  
• Myth 4: Corporations are a safer entity than LLC's for avoiding liability LLC's aren't called "limited liability" for nothing. A corporation is a separate entity, and its liability is separate from the liability of the owners, unless something happens to "pierce the corporate veil" and cause the owners and shareholders to be sued. A limited liability company limits the liability of the owners to their investment in the company.
• Myth 5: An LLC is a business entity for tax purposes
  An LLC is not a tax entity. How an LLC is taxed depends on how many members there are in the company. A single-member LLC is taxed as a sole proprietorship; a multi-member LLC is taxed as a partnership.

If you have other questions about LLC's and corporations, post a comment or use the forum.