When forming a business venture in Los Angeles, you have many decisions to make. This includes the type of business structure you choose. Two of the most popular legal options are to form a corporation or a Limited Liability Company (LLC). But which is the best solution for you? To answer this question, you must consider the key differences between these two business entities. In this article, we'll review the primary distinctions between corporations and LLCs as well as who should use each.

Corporations

A corporation is a separate legal entity with its own taxes and its own accountability. This legally independent status shields owners, directors, and stockholders from being held personally liable for business debts and obligations. At a most basic level, corporations have the advantage of “limited liability.” Unlike an LLC, a corporation is freely transferable and can exist in perpetuity. Corporations own, receive, and transfer property under their own legal Identity. This means they have their own tax registration with the IRS.

When forming a corporation, the company will need to organize and have initial shareholders, directors, and officers, draft corporate bylaws, and, depending on the circumstances, register with the local, state, and federal government. In most U.S. states, corporations must be formally governed by a board of directors and must also maintain various documents and records, including issuing stock offerings, holding board meetings, filing tax documents, meeting corporate resolutions, and maintaining corporate minutes.

Another key element of corporations is that they’re “freely transferable.” The ownership of the corporation is allocated among its shareholders through the issuance of stocks. These stocks can then be transferred or sold to another person or entity at any time without the approval or consent of the other shareholders.

LLCs

In contrast to a corporation, a limited liability company (LLC) is a pass-through business entity. This means that profits and losses are not taxed separately from the owners but “pass through” them directly to their personal tax returns. LLCs offer a less formal structure and are essentially a hybrid between a partnership and a corporation.

With LLCs, ownership is allocated among members, which can consist of individuals or other entities. An LLC provides limited liability protection, meaning the members’ personal assets are separate from the business. Unlike a corporation, LLCs don’t have to be concerned with having a board of directors or shareholders.

An LLC filing is also much simpler than that of a corporation and usually requires much less information than a corporate document. This includes filing Articles of Organization and drafting member operating agreements.

LLCs also offer the flexibility to select how they’ll be treated from a tax perspective, while corporations must be taxed “as a corporation.” This means that LLCs can opt to be taxed as either a disregarded entity, partnership, or a “corporation.”

Who Should Form a Corporation? Who Should Form an LLC?

When deciding between a corporation and an LLC, there isn’t necessarily a clear-cut answer. Many businesses enjoy the hybrid benefits of an LLC, while others prefer the traditional structure of a corporation. But in the end, the decision depends largely on your business’s goals and objectives.

For those businesses looking for limited liability protection and a more structured and formal business entity, forming a corporation may be a better solution. Corporations allow businesses to scale and offer the opportunity to issue stock options, which can give future investors added peace of mind.

Businesses requiring more flexibility and less formal structure, however, should most likely choose the LLC structure. LLCs offer the limited liability associated with a corporation, however they’re also much simpler to set up and manage. This can be especially beneficial for startups and small businesses lacking the resources for the intensive formation and compliance costs of a corporation. LLCs also offer the flexibility to be taxed as either a pass-through entity or to be taxed “as a corporation,” depending on the needs of the business.

When navigating the complexities associated with forming a business entity, it’s important to work with an experienced attorney that understands the local regulations. UpCounsel can connect you with lawyers in Los Angeles that have deep experience in business formation. Whether you need a one-time consult or an entire freelance legal department, UpCounsel’s network of experienced attorneys has you covered.

Topics:

Corporations,

LLCs,

Los Angeles