How is Forming an LLC Similar to Forming a Corporation: Everything You Need to Know
If you want to learn how forming an LLC is similar to forming a corporation, you’ll need to fully understand the purpose of both business structures, along with the advantages and disadvantages for operating each type of business.4 min read
How is Forming an LLC Similar to Forming a Corporation
If you want to learn how forming an LLC is similar to forming a corporation, you’ll need to fully understand the purpose of both business structures, along with the advantages and disadvantages for operating each type of business.
When a Corporation is Right for You
There are two types of corporations; S corporations and C corporations. Depending on what your business and tax needs are, one type of corporation might be more beneficial than the other.
The C corporation might be right for you in the following instances:
• If you need venture capital for financing
• If you want the company earnings to remain in the business
• If you want flexibility in terms of employee salaries to reduce Social Security and Medicare taxes
• If you want flexibility in terms of fringe benefit programs, i.e. life insurance, transportation assistance, educational assistance
• If you want to easily be able to sell your business
• If you want to provide a plan for travel and entertainment reimbursement
• If you want to be able to offer stock to employees
• If you expect your business to own or rent real estate
• If you want to reduce your risk to IRS audit exposure
The S corporation might be best for you if:
• You want to take advantage of the pass-through tax benefits; S corporations pass through the profits and losses to the owners, who then report it on their personal tax return. This is different from C corps, which are double-taxed.
• You want greater flexibility in terms of accounting methods used. While C corporations are required to use the accrual method of accounting, most S corps do not need to use this method unless they have inventory.
• You want to reduce the risk of IRS tax audits. As mentioned above, S and C corps lower their risk of auditing, as most audits occur on companies solely filing Schedule C of Form 1040, which are individual tax returns generally filed by those operating LLCs and sole proprietorships.
When an LLC is Right For You
An partnership">LLC might be the best choice for you if you anticipate losses for a period of at least two years, and want to be able to pass-through such losses to yourself and other members. Filing such losses on your own personal tax return will reduce the rate of taxes owed. Similar to S corporations, LLCs need not use the accrual method of accounting as C corps are required to do.. LLCs can own real estate more easily than corporations can. Furthermore, when operating an LLC, you need not have ongoing formal meetings or keep records of meeting minutes, as you would be required to do in a corporation. Therefore, LLCs have less formal requirements in the ongoing maintenance of the business.
Forming Your LLC or Corporation
When forming your LLC or corporation, you’ll need to choose a business name and file either Articles of Organization (LLC) or Articles of Incorporation (Corporation). This document will contain information regarding your business, including the name/address, members or shareholders, registered agent name/address, and the purpose of your business. This document is similar for the LLC and corporation. The difference when forming your business lies in the fact that an LLC is not required to appoint a board of directors or issue stock certificates as with a corporation. If you are forming a corporation, you want to ensure that you comply with federal securities laws when issuing stock.
Business Ownership and Operations
Owners of a corporation are referred to as shareholders, whereas owners of an LLC are referred to as members. While the names might be different, there is very little difference in terms of the roles and responsibilities of such person.
LLCs have the freedom to distribute ownership interest however they wish to do so. Therefore, one member can have 25% interest, whereas other members could have 15% interest in the LLC. While a corporation can do the same for its shareholders, it must do so by creating a unique stock class structure, and this is allowed only in C corporations. In this case, S corporations cannot create a unique stock class structure, and therefore, the company can have only a single class of stock in which all shareholders have an equal proportion to the interest in the corporation.
Shareholders in a corporation are not paid, but instead receive dividends, which are included on the shareholder’s personal tax return. Members of an LLC however, are taxed like partners in a partnership.
Any member of the LLC can act as the manager, and the LLC can designate that member to act as manager on behalf of the LLC. If this occurs, that manager will have the authority to make important decisions and oversee the daily operations of the LLC. A corporation, however, must have a formal corporate structure in place, naming a board of directors who are responsible for handling the important business matters. Therefore, the shareholders in the corporation only have voting power. With that said, a shareholder can be elected as a director or appointed as an officer of the corporation, but cannot be a board director.
If you need help forming your LLC or corporation, or have questions about which to form, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5-percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law, and average 14 years of legal experience, including work with, or on behalf of companies like Google, Menlo Ventures, and Airbnb.