Is an LLC Considered a Corporation: Everything You Need to Know
Is an LLC considered a corporation? A limited liability company, or LLC, is considered a corporation if the LLC owners elect to be treated as a C or S corporation for taxation purposes.4 min read
Is an LLC considered a corporation? A limited liability company, or LLC, is considered a corporation if the LLC owners elect to be treated as a C or S corporation for taxation purposes. Both an LLC and a corporation must register with the state. An LLC is a pass-through structure formed by one or more person, designated as the owner or owners. With pass-through companies, the owners and/or shareholders directly receive the business's profits and losses. Business income is considered their personal income and is taxed on the person's individual taxed return.
The owners of the LLC must develop an operating agreement and file articles of organization. If you are deciding whether to start an LLC or corporation, an LLC is likely the right choice if any of the following conditions apply:
- You expect to run at a loss for at least the first two years of business and want the owners to be able to absorb these losses.
- You prefer a flexible accounting method.
- Your business owns real estate.
- You prefer a flexible management structure.
- You want to minimize the need for formal annual meetings and documentation thereof.
- You want profit-sharing flexibility.
An LLC structure protects your personal assets from business liability. Unlike with a corporation, LLC owners don't have to be permanent residents or U.S. citizens. The management structure of an LLC is also more flexible.
However, LLCs cannot attract investors by issuing stock. They may also be subject to different laws in different states.
What Is a Corporation?
A corporation is a business structure where profits and losses are taxed to the corporation rather than to the owners as with an LLC. To form a corporation, you must assign shareholders and file organization forms with the state where you do business. You must create a Board of Directors to oversee corporate operations. Incorporating helps protect your personal assets from lawsuits and/or debts accrued by the corporation.
Filing corporations">Articles of Incorporation automatically designates your business as a C, or regular, corporation. This type of business is considered a separate entity for tax purposes. However, C corporation owners are subject to double taxation since dividends are taxable to the business and subject to personal income tax. For this reason, most small businesses decide against establishing a C corporation.
A C corporation might be the right structure for your business if any of the following conditions apply:
- You plan to seek venture capital.
- Flexible profit-sharing is desired.
- You plan to grow your business using the profit it creates.
- You want the tax advantages of distributing profits to owners and shareholders.
- You want to be able to set salaries for owners and employees.
- You plan to provide health insurance and other employee benefits.
- You plan to sell the business in the future.
- You want an accountable entertainment and travel plan.
- You plan to offer employee stock options.
- Your business owns or plans to buy real estate.
- You want to lower your risk of an IRS audit.
YouTube as an LLC
YouTube registered as a corporation in the state of Delaware in October 2005. Just over a year later, the corporation was converted into an LLC. The ability to change to a different entity at any time is a unique benefit of companies based in Delaware. Only a few members own YouTube LLC. Because Delaware LLCs do not require public disclosure about members, financial valuation, and ownership percentages, these members are the only people who know the specifics of YouTube's financials. LLCs in Delaware are not subject to state or federal public registration or disclosure. The owners of YouTube chose this model after meeting Google investors and realizing that they could receive funding without public status.
Google as a Corporation
Google became a corporation in 1998 and went public on the NASDAQ in 2004. They took this step so that they could raise money from investors. Although a large portion of Google is owned by organizations and corporations, millions of individuals also own shares of the company.
LLC or Corporation: Which Should I Select for My Business?
New business owners often receive conflicting information from well-meaning friends and acquaintances, which can make it confusing to determine if you should register as an LLC or corporation. Except for sole proprietorships, all businesses must register as a specific type of business in the state where they are located. Depending on the state, choices typically include corporations, partnerships, LLCs (limited liability companies), or variations of those structures. New businesses must consider a range of factors when deciding what type of business entity to register.
If you need help with establishing an LLC or corporation, 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.