Corporations vs LLCs: A Guide for Executives in Chicago
Most executives in Chicago understand the importance of securing professional legal counsel to help them structure and manage their business affairs3 min read
Most executives in Chicago understand the importance of securing professional legal counsel to help them structure and manage their business affairs. However, the different types of legal entities can be daunting, especially for entrepreneurs and business owners trying to secure the right vehicle for their venture. The choice between forming a business as a corporation or a limited liability company (LLC) is probably the toughest decision in the process.
When deciding which of the two most commonly used business formation types to opt for, it’s important to understand every aspect of the structure. Corporations and LLCs vary in terms of ownership, taxation, management, capitalization and compliance requirements. In this article, we provide an overview of the differences between a corporation and an LLC so executives in Chicago can make an informed decision when launching their business.
The salient difference between the two forms of business is ownership. A corporation is usually owned by multiple shareholders. Each of these shareholders, who are also referred to as members, are liable to pay tax on their dividends just like normal income from earnings. They are not liable for any losses incurred by the company.
An LLC on the other hand is owned by a single individual, or a group of people who are jointly known as members. However, the members of an LLC are protected from any personal liabilities or debts incurred by the company.
Taxation is the most significant difference between corporations and LLCs. Corporations are required to pay tax on their profits, but the good news is that shareholders also retain the option for a double taxation system which can be of significant benefit. The system allows the corporation to pay the tax on profits and then shareholders declare it as their own income when they receive dividends. However, income from LLCs is not subject to double taxation in this way.
Furthermore, corporations are required to file tax returns annually and therefore they must keep up-to-date records of all transactions. The LLC on the other hand can opt for a pass-through taxation system which means that the profits are distributed amongst its members who then pay taxes on it according to their personal tax return filing system.
The management structure of a corporation is complicated as the business requires a board of directors that makes the key decisions. On the other hand, an LLC may be managed by all its members, one member or an appointed representative.
When it comes to capitalization, corporations are known for their flexibility in raising funds for their ventures. Because of their nature and structure, the stock of a public corporation can be bought and sold in the market, making them ideal candidates for an initial public offering (IPO). They also have the capacity to generate large sums of capital by selling stocks.
In comparison, LLCs cannot offer equity to the public due to their nature. They must depend on ventures, venture capitalists and private investors for their capitalization needs.
Getting the appropriate permits and licenses is an important part of the process of setting up a business. Corporations must strictly adhere to the stipulated rules and regulations as applicable for the state in which they are carrying out business operations. Also, relevant documents such as meeting minutes must be kept and filed. On the other hand, LLCs are not required to strictly adhere to the same regulations as corporations. They only have to submit an annual report to the Secretary of State.
For executives and entrepreneurs in Chicago, deciding between forming a corporation or an LLC requires an understanding of the differences between the two. In terms of ownership, taxation, management, capitalization and compliance requirements, the differences between a corporation and an LLC are clear. Depending on the individual goals and objectives, entrepreneurs should decide which of the two is best suitable for their business.