Corporations and Limited Liability Companies (LLC) are the most common types of businesses set up by entrepreneurs and new business owners. Both options provide benefits for a business, but they also offer different levels of protection.
If you are seeking to start your own business, you probably have a lot of advice coming your way. Either option will help you keep your business activities and personal activities separate for liability protection. Keep reading to learn more about the difference between an LLC and a corporation.
What is an LLC?
An LLC, or Limited Liability Company, is a legal structure for a business. By forming an LLC, you can protect your personal assets, including your home or car, in case your business is sued. The protective wall created by this business entity enables you to secure your personal assets from creditors or lawsuits.
An LLC is owned by members, and the company can have one or multiple owners. The term “LLC” is often mistaken for Limited Liability Corporation, which does not actually exist. Instead, a Limited Liability Company is a separate entity apart from you and your personal assets.
What is a corporation?
Like an LLC, a corporation is a legal business entity. Forming a corporation enables the owner or owners to separate themselves from the business and protect personal assets. Shareholders are able to reap the profits of the business without taking on personal liability for the corporation’s debts.
Corporations have owners or shareholders, but they are run by a Board of Directors. Operating documents and bylaws for the business are agreed upon by the board to oversee operations.
How are LLCs and corporations different?
While both entities provide liability protection for business owners, they are very different in many ways. From how the business is formed to filing taxes and reporting, keep reading for the biggest differences between an LLC and a corporation.
Forming the business
The owner of owners of a business can file articles of organization in order to form an LLC. An operating agreement is put into place by the owners, or members, to manage day-to-day business activities. This document also determines the share of ownership for each member, if there are more than one.
To form a corporation, shareholders who own the business incorporate. Articles of incorporation are filed and a board of directors is created. Regular board meetings are required for the corporation to maintain its status, and records of each meeting must be kept. LLCs do not need to create a board of directors or hold board meetings.
Ownership
For an LLC, owners are known as members. Each member owns a percentage of the company, or a member interest. Unless specified in the operating agreement, it can be difficult to transfer membership in the LLC. In some cases, the LLC has to dissolve if a member leaves.
Corporations are owned by shareholders. These people own shares of stock, which can be transferred to different owners. Corporations can more easily take on outside investors or make public stock offerings because stocks can be transferred.
Taxation
Corporations are subject to double taxation. For corporate profits, federal income tax is paid. Shareholders must also pay tax on the dividends received from the business. There are ways to avoid double taxation, including taxation as an s corporation.
The tax structure for an LLC is more flexible. If the business has one owner, the company is taxed as a sole proprietorship. If the business has multiple owners, it is taxed as a partnership. The members of an LLC are only required to pay tax on their personal tax return. In some cases, members of an LLC may be required to pay self-employment tax.
Management
LLCs can be managed in a variety of ways, and they offer considerable flexibility when it comes to managing the business. In most cases, the members are very involved in the daily operations and running of the business. This structure is called a member-managed LLC. If the members are hands-off with the business, it is called a manager-managed LLC.
For corporations, the board of directors is responsible for establishing business policies and overseeing management. Officers of the company directly oversee day-to-day operations. Shareholders may be involved in the running of the business, but for larger corporations they typically have inactive roles.
Should i form an LLC or a corporation?
The answer to whether you should form an LLC or corporation depends on your specific business needs. While both options can help protect an entrepreneur’s personal assets, they create very different business entities. Working with an experienced attorney and CPA can help you make the right legal decisions for your business and ensure you choose the right taxation options.
