Applying for federal tax ID numbers is an important first step in starting a new business. When a business owner applies for a tax ID through IRS-EIN-Tax-ID, he or she must choose the type of entity the business is.
The sole proprietor tax ID number is the obvious choice for self-employed people who have no employees besides themselves. It is also appropriate for people who are only employers in that they employ babysitters or housekeepers. When it comes to bigger companies, however, it is not always easy to choose an entity type. Here are some factors to consider when choosing to register as a corporation or limited liability company (LLC).
The IRS treats corporations as though they are completely separate entities from their owners and shareholders. The term “corporate personhood” means that corporations have rights and obligations just like people. They can owe money and be owed money, and they can be parties in lawsuits.
This can be a problem when the corporation owns property. Both the corporation and its owners are responsible for paying taxes, leading to double taxation. The tax burden on corporation owners can get quite heavy.
Limited Liability Company (LLC)
A limited liability company (LLC) is not required to pay taxes on its income. The profits and losses of the LLC are figured in with the tax obligations of each of the owners of the LLC.
While LLCs are an attractive choice for very small businesses, problems arise when the company gets bigger. Only a corporation can issue stock certificates to shareholders; an LLC cannot.
Whether to register your business as a corporation or LLC depends on the size and goals of the company. To keep things simple for a small business, an LLC is the better choice. For a large, long-lasting company, registering as a corporation is better.