Can a Corporation Be an LLC: Everything You Need to Know
Are you wondering, can a corporation be an LLC? A corporation cannot be an LLC because the two are different business structures that fall under different rules of taxation and formation. 3 min read
Are you wondering, can a corporation be an LLC? A corporation cannot be an LLC because the two are different business structures that fall under different rules of taxation and formation.
Differences Between LLCs and Corporations
It can be tough to choose the perfect business type for your company. Business entities may form as a corporation, limited liability company (LLC), or partnership in every state.
LLCs do not incorporate, so they are not corporations. Both corporations and LLCs register with the SOS, but they are different types of entities.
The IRS views business entities in two different ways:
- Pass-through entities.
- Separate business entities.
Pass-through entities are businesses that pass the profits and losses of the company through to their owners (or members). The income of the company is not taxed as business income, but rather it is considered the income of the shareholders (owners), and is taxed accordingly. Shareholders will claim the profits of the business on their personal income tax returns.
Both LLCs and partnerships are classified as pass-through entities.
Separate business entities are taxed as businesses. The profits of the company are taxed and then, once dividends are distributed to shareholders, the profits are taxed again as the income of the owners. Corporations are classified as separate businesses entities.
Corporation shareholders are also called its owners and LLC members are called owners.
There are several other major differences between LLCs and Corporations.
LLCs can distribute company profits to their owners regardless of capital contributions and ownership percentages, if the owners decide to do so. (For example, an LLC might specify in its operating agreement that all members receive equal shares of any company profit.)
C Corporations (C Corps) can also build a unique structure for their share distributions, but S Corporations (S Corps) are required to distribute shares according to ownership percentages. S Corporations avoid the double taxation, as they operate as pass-through entities when it comes to taxation, but they don't allow the freedom to decide stock classes and structure.
If you want to form a corporation, but want to be able to control your stock structure, your company must be subject to double taxation.
LLCs can elect any of their members to act as managers or they can be member-managed, in which case all of the members are also managers.
Corporations are required to follow a corporate business structure and therefore elect a Board of Directors that will manage the company's operations. Different officers are given responsibility over particular aspects of the regular business tasks. The directors act as the managers of the company. Shareholders are kept separate from the board and the officers, in a class that is not included in the everyday business decisions of the corporation.
Shareholders in a corporation are included in major company decisions and have the ability to elect the board of directors. Directors and officers are nominated and elected from the pool of shareholders.
The business structure of a corporation has been a part of the United States system of business for a very long time. This long history of corporations has allowed for many legal discrepancies to be worked out and case laws to be formed. Now, when disputes arise in corporations, the court system can look back at plenty of case law to decide on the issue.
Individuals forming corporations can also benefit from this rich history with resources to prepare them for potential issues. Corporate law is quite uniform across the United States, so there's a good amount of clarity when it comes to corporate law.
LLCs have not been around nearly as long as corporations. The first LLCs were legally formed in the United States in the 1970s. They were first meant to be a sort of hybrid of the corporate and sole proprietorship business structures. Because LLCs are new, many states have different rules and requirements for LLCs, plus their hybrid nature can lead to a lot of confusion in formation and the handling of legal discrepancies.
Depending on the regulations for LLCs in a specific state, it might be more beneficial for a company to form as a corporation than an LLC.
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