Starting a business in North Carolina can be a very exciting and also nerve-racking time. People need to make many different decisions when they start up to ensure their business will get off the ground and thrive. Many of the decisions relate to the specifics of the individual business, but business owners should also make sure they organize their business to create a separate legal entity from them as individuals.
There are many different options for business formation, but two of the more popular options are either forming as a Limited Liability Company (LLC) or a Corporation. These both have similar attributes, but there are differences between them, which may make one more desirable than the other for one’s business.
Limited Liability Company (LLC)
LLCs are formed by members who file Articles of Organization to form the business. The members then would also draft an operating agreement to detail how the business will be run. The members of the LLC then share ownership of the company.
One way that LLCs are different than corporations though is that LLCs are called pass-through entities for tax purposes. This means that any profits and losses from the company are filed on personal tax returns and the company itself does not pay the taxes. This means that the members will also have to pay self-employment taxes on their individual tax returns.
Corporations are started by filing article of incorporation. A Board of Directors is established who will then write the bylaws for the corporation, which states how the company will be run. The board of directors run the company, but the corporations are owned by shareholders who have stock in the company.
Corporations pay taxes on any profits and losses of the company instead of those passing through to the shareholders. The shareholders will pay dividends on their stock. Also, any owners and workers at the company, who could also be shareholders, are usually paid wages or salary, which is what they will report as their income on their individual tax returns. Therefore, they will not pay self-employment taxes.
Both of these business formation options will protect the owners of the company from any personal liability for the business, but there are important differences that people should be aware of when starting a company in North Carolina. At Daughtry, Woodard, Lawrence, & Starling understand the differences. For more information please contact our Business Law page on our website.