When starting a small business in Oregon, one of the first big decisions you’ll face is choosing a legal structure. Two of the most popular options are Limited Liability Companies (LLCs) and corporations. Both offer liability protection, but they differ in taxation, formalities, and their suitability for various types of business ventures. Here’s an overview of their key differences to help you decide which structure might be right for you.
- Personal Liability Protection
Both LLCs and corporations provide owners with protection from personal liability for the business’s debts and obligations.
- Corporations: Owners (shareholders) are generally not personally liable for corporate debts because a corporation is a separate legal entity. However, this protection can be lost if shareholders fail to follow corporate formalities, such as maintaining accurate records or holding regular meetings, or if they engage in illegal or unethical conduct.
- LLCs: Members (owners) of an LLC also enjoy personal liability protection, however, the legal shield may not be as robust as that of a corporation unless the LLC follows proper operational procedures. Our office can guide you on how to comply with these requirements and ensure your personal assets are protected.
- Taxation
Tax treatment is one of the most significant differences between LLCs and corporations.
- Corporations: Corporations are taxed as separate entities, meaning they pay taxes on their profits. In addition, shareholders pay taxes on any dividends they receive, resulting in double taxation.
- LLCs: LLCs are typically taxed as “pass-through entities,” meaning profits and losses flow directly to the owners’ personal tax returns. Owners pay taxes on their share of the profits, even if the LLC retains the earnings. This pass-through taxation can be advantageous for small businesses.
- Real Estate Considerations
If your business involves real estate, choosing the right structure is critical.
- Corporations: Corporations can own real estate and provide liability protection to shareholders. However, the potential for double taxation makes them less ideal for real estate ventures.
- LLCs: LLCs are often a better choice for owning real estate. They combine liability protection with pass-through taxation, avoiding the double taxation issue associated with corporations. Additionally, LLCs offer more flexibility in ownership and management, making them well-suited for real estate investments.
- Oregon-Specific Requirements
Oregon law governs corporations under the Oregon Business Corporation Act and LLCs under the Oregon Limited Liability Company Act. The formation process for each entity includes key differences:
Corporations:
- File articles of incorporation with the Oregon Secretary of State.
- Adopt bylaws.
- Hold regular meetings of the board of directors and shareholders.
LLCs:
- File articles of organization with the Oregon Secretary of State.
- Draft an operating agreement outlining ownership and management structures.
Both structures require filing fees and adherence to state-specific regulations.
How We Can Help
Selecting the right legal structure for your business is a critical decision that affects taxes, liability, and operational flexibility. At BLG, we can assist with entity formation, help you navigate Oregon’s legal requirements, and provide ongoing support to ensure your business stays protected. We help hundreds of business clients manage the yearly requirements for their corporations and LLCs – instead of a bunch of tasks to remember, we handle it for a low yearly fee.
Let us help you lay a solid legal foundation for your business and ensure you’re prepared for success.