Both an LLC and a corporation are legal entities that are created and regulated by state law. Each entity is legally separate and distinct from the persons who own, direct, manage, and operate it.
To protect yourself and your assets and to maintain all the advantages of having an LLC or corporation you must follow all the rules and regulations for running it. Failing do so will result in your company being stripped of its status as a legally distinct entity and all the benefits such status affords you.
And just what are those benefits?
First and foremost—limited liability protection. Company shareholders, members, directors, officers, and managers will usually not be held personally liable for company debts and obligations. If the company cannot honor its commitments creditors cannot take any of the personal assets of the company owners or principals.
Second—tax flexibility. If you formed an LLC you can elect how you want to be taxed. Single owner LLCs can be taxed as a sole proprietorship. Multiple owner LLCs can be taxed as a partnership. Both can elect to be taxed as a corporation.
And corporations are automatically treated as a separate taxable entity, meaning that business income can be sheltered in the corporation by taking advantage of more sophisticated tax reduction strategies that aren’t available to sole proprietorships and partnerships.
Third—business credibility. Formally organized and structured businesses send a signal to others that you have a legitimate, bona-fide business and that you are committed to the success of your venture as an ongoing, profitable enterprise. You show the world that you’re treating your business as a business, not a hobby or part-time diversion.
Fourth—fringe benefits. Especially when it comes to a company taxed as a corporation, its owners and employees are eligible for tax-deductible fringe benefits like group health, dental and disability insurance, sick pay, medical expense reimbursement, and tuition assistance.
Fifth—perpetual duration. Both LLCs and corporations can exist forever, regardless of any change in ownership or management.
Finally—ability to raise capital. Whether it’s attracting human capital or financial capital, formally organized business entities have the edge. Lenders will give an LLC or corporation special preferences. And many private investors prefer formally structured business as well.
So take your business seriously by never forgetting the importance of protecting your LLC or corporation’s status as an entity in it’s own right.