The first step to assess whether an LLC is a corporation is understanding what an LLC and corporation are. An LLC stands for a limited liability company, while a corporation is a separate legal entity that has limited liability for its members. Both entities share many of the same traits such as a centralized structure of management, legal protection for both its owners and their assets, and potential tax savings. Despite these similarities, they are a bit different. Below are five things to consider when determining if your LLC is a corporation.

1. Liability and Ownership Protection

The key to determining if an LLC is a corporation is understanding the legal protection available to both owners and their assets. With limited liability protection, both entities can protect collaborators from personal liabilities incurred by the business. However, corporations are taxed differently than LLCs at both the state and federal levels. When considering if an LLC is a corporation, you must consider which business entity and tax rate best suits the purpose for which the business is created.

2. Management Structure

Another factor to consider when establishing a LLC or a corporation is the management structure. An LLC is typically managed solely by its owners. Corporations, meanwhile, can be managed by a board of directors, officers, and shareholders. This structure allows for greater oversight of the company, as well as more protection for those involved in its management. As a rule of thumb, if the LLC needs more oversight, then it is better to form a corporation.

3. Taxation

The taxation of an LLC or a corporation can be affected by several factors. Corporate entities are taxed separately from their owners, meaning profits or losses of the business are taxed outside of the owners’ personal taxes. LLCs, however, are not taxed as a separate entity and its profits or losses are taxed together with its owners’ personal taxes. Additionally, LLCs may be taxed differently from one state to another, depending on how the business is categorized by the IRS. It is important to understand the tax implications of an LLC or a corporation when first forming the business entity.

4. Flexibility

Flexibility is another factor that should be assessed when determining if an LLC is a corporation. LLCs offer greater flexibility with regard to ownership, management, and taxation. For example, LLCs have few restrictions on who can own shares and can be managed by one or more individuals, even those not involved in the day-to-day management of the business. Corporations, however, are subject to certain rules and regulations regarding how they can be structured, who can be involved in the ownership and management of the company, and how they can be taxed.

5. Regulatory Requirements

It is important to consider the local regulatory requirements when determining if an LLC is a corporation. In the State of Illinois, for example, forming a corporation requires filing Articles of Incorporation, observing certain formalities, and following certain disclosure requirements. LLCs, meanwhile, require filing a Certificate of Organization, as well as preparing an Operating Agreement that outlines the relationships of the parties involved and the operating procedures of the business. Depending on the type of business, there may be additional steps that must be taken in order to comply with state laws and regulations.

For Chicago-based businesses, seeking counsel who understand the local regulations is key when determining if an LLC is a corporation. Working with experienced lawyers is the best way to ensure that the business is set up correctly and that all necessary legal paperwork is filed correctly. UpCounsel offers businesses access to experienced lawyers who understand the requirements for forming both an LLC and a corporation. With UpCounsel, businesses in Chicago can be sure that their business is set up properly and that they are compliant with local regulations.

Topics:

LLC,

corporation,

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