An LLC is not a corporation even though it offers some of the same protections that incorporation does. It's also simpler to create an LLC than it is to incorporate which makes forming an LLC an attractive option when those who are involved don't want to deal with what goes into creating a corporation. 

Your Business Type

Organized legal entities, aka a business, have to register as a specific type of business in the state they operate. Sole proprietors are exempted from this requirement. All states recognize the various forms of business entities, corporations, and partnerships along with the different forms. All of these types make it difficult for a new business to determine which is the best one to use when taking in all factors. How you are taxed and paid as the owner of a corporation or LLC could be the deciding factor when it comes to the form of business you choose.

What Is an LLC?

LLC is short for Limited Liability Company. This is the only recognized definition as Limited Liability Corporation does not exist as a legal structure. Corporations and LLCs register with the state they reside in, but an LLC does not have to incorporate. LLCs are what is known as pass-through entities. It is formed by one or more persons as owners of the company. The owners or founding members of the LLC file the Articles of Organization and create an Operating Agreement.

The reason why an LLC is called a pass-through type of business is because the losses and profits are passed onto the owners. It also gives the members personal liability protection. You might find that the reasons to form an LLC are compelling if:

  • You have a brand-new business and you anticipate losses for at least two years and you prefer to pass the losses through to the other owners and yourself.
  • The business might own real estate at some point.
  • Flexibility in the type of accounting used as C corporations are usually required to use the accrual method for accounting.
  • You want to keep the ongoing formalities at a minimum and avoid the need to have annual meetings of shareholders and directors.
  • Flexibility for sharing profits among the members is preferred.

Most choose to incorporate an LLC in the state in which the business operates although some choose to form their LLC in Delaware. A Delaware LLC keeps the personal information of the members, their percentages of ownership, and the financial valuation private. There is no need for public disclosure with a Delaware LLC. If you decide to create an LLC in a state other than the one where the business operates, you may be required to register in the state you operate as a foreign business. This usually results in paying fees taxes and registration to the state of qualification and the state of registry.  

What Is A Corporation?

Corporations are business entities that are separate from the personal. They are formed by filing corporate organization forms in the state where the business is located and designating shareholders who own a specific amount of shares. The corporation also forms a Board of Directors to oversee and guide the business. The corporation is set up under state law to create a separate legal entity that protects owner or shareholder assets from claims by creditors. 

The act of incorporating the business automatically makes it a regular or C corporation. The C corporation becomes a separate taxpayer with income and expenses taxed to the corporation. The owners do not get separate taxation as a result of profits from the business. In the event profits from the corporations are distributed to owners as dividends, the owners have to pay personal income tax on those distributions. This creates double taxation as the corporation pays taxes on the profit first, then the person receiving the dividend has to pay taxes on the profits as income received. Many small businesses avoid this form of incorporation due to the double taxation feature even though there are ways around it. An LLC is a much simpler structure and its straightforward features make it an appealing alternative to incorporation.

If you need help with understanding the legal implications of forming an LLC, 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.