Is an LLC a Corporation?

Many business owners wonder, "Is an LLC a corporation?" Although both are similar, an LLC is not a corporation mainly because it does not incorporate.

Limited liability companies or LLCs were first introduced to some of the U.S. in the 1970s. All 50 states, including the District of Columbia, approved organization of LLCs as of 2010. Of all business structures, the limited liability company is the least complicated. Whereas a C corp or S corp can be rigid, they have a flexible build.

Advantages of Forming an LLC

There are three main benefits to starting a limited liability company:

  • personal property has legal protection
  • limited liability
  • pass-through taxes

You need not be a permanent resident or a citizen of the U.S. to own an LLC in the country. Suppliers, partners, and lenders each share a favorable view of businesses that are LLCs. Public anonymity is a perk for many owners. Although different states have various laws regarding limited liability companies, no federal mandate requires the owner of an LLC to disclose their identity on public record.

One person or multiple business people, acting as owners, can form an LLC. When a limited liability company gets established, owners, also referred to as members, set out an Operating Agreement and file Articles of Organization. By forming an LLC, the members get protected from the actions of the business.

What Are Similarities Between an LLC and a Corporation?

As mentioned above, one difference between a corporation and an LLC is structure. However, the two entities are alike in a few ways. Both types of businesses have limited liability. An owner's personal property and assets are safeguarded from creditors and only within the bounds of their capital contributions are owners responsible for debts of the company. 

The initial forming of an LLC and a corporation are straightforward and easy to accomplish. Both entities get created under state law which regulates their operation and places restrictions on aspects of their structure. Every state recognizes a company organized as partnerships, LLCs, corporations, or variants of these. There is no limit to the number of members either a corporation or an LLC can have nor does it matter who can be an owner.

How Is a Corporation Set Up?

A corporation gets formed by an owner filing corporate organization forms in the state where the business operates. Shareholders have to get designated, and each has an individual number of shares. One way a corporation differs from an LLC is that it can issue stock. Also, they need to have a board of directors. 

All the minutes of board and shareholder meetings have to get recorded and kept together. The management structure is strict. Directors handle the decision-making for the business and officers look at the day-to-day aspects of maintaining how the organization operates.

There are two types of corporations: C corporations and S corporations. Taxation is considered the most outstanding difference between the two according to many business owners. With the S corporation, the significant advantage is that owners can use losses from business as deductions on their income tax returns.

When evaluating restrictions, the differences between an S corporation and an LLC become evident. The S corp cannot have over 100 members, and they must be residents of the same state as the company's location. Also, neither C corporations, other S corporations, LLCs, and non-qualified trusts can be owners of an S corporation.

Outside of the taxation favorability of an S corp, most developing businesses incorporate as C corporations. Many owners like the ability to hold common and preferred stock, among other types of stock interests. Doing so permits dividends at different levels. Also, from year to year, a C corp can amass and hold onto earnings but with limitations.

How Do LLCs Get Taxed?

The IRS recognizes limited liability companies like the following entities for taxes:

  • One-member LLC and the member gets accredited with the income
  • Multi-member as a partnership
  • C corporation
  • S corporation, if the LLC qualifies

There is no risk of double taxation. Owners report profit shares and losses on personal tax returns, leaving a corporate tax return unnecessary. Self-employment taxation may apply to LLC earnings. Also, appreciated assets can have tax recognition which could occur when forming an LLC from an existing business.

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