The most commonly asked question for new business owners is should I be a corporation or an LLC.
In order to become a corporation or limited liability company (LLC) in Minnesota, an organization must file its articles of incorporation, in the case of a corporation, or articles of organization, in the case of an LLC, with the Minnesota Secretary of State’s office.
In 1992, prior to the creation of LLCs, there were 10,043 new corporations filed in Minnesota each year. Since the creation of LLCs, they have taken over as the business entity of choice. In 2013, the Secretary of State’s office formed 29,175 LLCs, compared to 5,889 corporations.
Generally speaking, the popularity of LLCs has been the result of their operating flexibility, compared to the rigid structure of corporations. Popularity is not the whole story, however.
LLCs are better for liability protection. Corporations and LLCs offered pretty much the same liability protection until August 2015, when the Minnesota Legislature changed the LLC law to improve the liability shield for members. Minn. Stat. ‘ 322C.0304, states that “the debts, obligations or other liabilities of a LLC, whether arising in contract or tort or otherwise, are solely the debts, obligations or other liabilities of the company, and do not become the debts, obligations or other liabilities of a member, manager or governor solely by reason of the member acting as a member, manager acting as a manager, or governor acting as a governor. The failure of a LLC to observe LLC formalities of its internal affairs is not a ground for imposing liability on members, managers or governors for the liabilities of the LLC.” This is great liability protection!
Corporations can be better for taxes. Both corporations and LLCs may be treated as Subchapter S corporations by filing an IRS Form 2553 with the IRS. Subchapter S status allows a corporation or LLC to disregard paying tax for the corporation or LLC, and the income passes through to shareholders or members which avoids double taxation.
Subchapter S corporations are preferred by some accountants because they can deduct some payroll charges like FICA or Medicare tax which means the corporation has less income and so taxes are lower. Members of Subchapter S LLCs have to pay self-employment tax on distributions and they are not allowed to deduct the self-employment tax. This means LLC members miss this tax deduction, so the LLC’s income is higher, so LLC members pay more tax.