Do Corporations Have Limited Liability: Everything You Need to Know
Do corporations have limited liability? Yes, corporations afford shareholders protections from business liabilities and debts. 3 min read
2. LLC Flexibility
3. Corporation Basics
Do corporations have limited liability? Yes, corporations afford shareholders protections from business liabilities and debts. Although the business itself does not have limited protections, the business absorbs any liabilities, while the owners/shareholders do not have to pay for such obligations from their personal assets. If a corporation faces a lawsuit, only the business assets would be subject to seizure and not the personal assets of shareholders. Such personal assets come in the form of:
- Bank accounts
However, the owners must adhere to various standards when it comes to maintaining a corporation to retain limited protections. Limited liability is a prime feature of a corporate structure, but such protections are also found in LLCs as well. Other entities such as general partnerships and sole proprietorships do not carry such protections. The LLC is an entity that carries the same protections of a corporation but is taxed in the same manner as a sole proprietorship (in the case of single-member LLCs), or a partnership (multi-member LLCs).
When it comes to partnerships or sole proprietorships, all partners and owners are personally responsible for business liabilities from their organizations. This means that creditors could claim their personal assets if they wish to seek compensation in front of a judge. Therefore, all personal property would be open for seizure to satisfy business debts.
An LLC offers the same level of protections as a corporation, with less paperwork required. Further, running an LLC is less complex than running a corporation. For instance, running a corporation comes with the following duties:
- Appointing shareholders
- Keeping extensive records
- Holding annual meetings between board members and shareholders
- Submitting annual reports
- Recording meeting minutes
LLC owners are free to tailor their management structure in the same way as a corporation, but this is not a requirement, and owners can construct their management system however they please. All terms should be included in your operating agreement, which establishes the operating procedures of your business. Although operating agreements are not mandatory, you should draft an agreement so all parties know the terms and operating parameters of the business.
When it comes to taxation, corporations are taxed differently than LLCs. For instance, corporations must pay business income taxes, whereas LLCs do not. LLCs operate under pass-through taxation, where all losses and profits flow from the company to individual shareholders. The owners would then file such information on their individual tax returns and pay any taxes owed. On the other hand, corporations are subject to double-taxation, where shareholders pay business incomes taxes and personal taxes noted on their personal returns.
With that, LLCs are flexible in the respect that owners can choose how they are taxed. In addition to being taxed as a sole proprietorship or partnership, owners can also choose a corporate tax structure. However, an LLC with a C corporation tax structure would be subject to the same double-taxation as a standard corporation. LLCs can also choose a special S corporation tax designation, which affords the same double-taxation as a regular LLC and an S corp. Tax structure comes with various tax benefits. It should be noted that an S corp. designation is not a legal entity, but a special tax label that the IRS gives to LLCs or corporations if those organizations meet certain criteria:
- An S corp cannot have over 100 shareholders
- Non-U.S. citizens and residents cannot be shareholders
- Only one class of stock is permitted (no tiered stock options allowed)
LLCs are not subject to a 100-owner limit, and non-citizens can own shares in the business freely, including C corporations.
C corps are a standard corporate entity that all owners begin with once they finish the incorporation process. When registering a corporation, one benefit you receive is raising a large amount of capital through a public issuance of stock. However, corporations face extensive regulations from the Securities and Exchange Commission, especially when public stock is involved. Unlike an S corp., owners can offer tiered stock options: preferred and common. Preferred stock is a first-class stock that investors receive, allowing them priority access to dividends and profits before common stockholders. The common variety is usually held by investors, allowing them a single vote and dividends after preferred stockholders have been compensated.
To learn more about if corporations have limited liability, you can post your job on UpCounsel’s website. UpCounsel’s lawyers will help you in all cases pertaining to contract limited liability and your rights as a business owner. In addition, they will defend your interests if you must settle disagreements in court.