Limited Liability Company vs Corporation: Everything You Need to Know
Comparing a limited liability company vs. corporation is important when you're trying to decide the best structure for your business. 3 min read
2. Tax Entity vs. Legal Entity
3. What's the Difference Between LLCs and Corporations?
Comparing a limited liability company vs. corporation is important when you're trying to decide the best structure for your business.
Intro to LLCs and Corporations
When you make the decision to incorporate your business, you will be transitioning from a general partnership or sole proprietorship into a company that is formally recognized by your state. Essentially, this means that you and your business will be legally separate.
When you incorporate a business, you will generally choose one of two structures:
- A corporation
- A limited liability company (LLC)
If you choose to structure your business as a corporation, you can choose either a C-corporation or an S-corporation. Whichever incorporation option you choose, you will benefit in several ways, including boosting your credibility and protecting yourself from personal liability.
Each incorporation type offers distinct advantages and disadvantages You will indicate that your business is a corporation by using either the “Corp.” or “Inc.” designation. Whether you form a corporation or LLC, you will need to file certain documents with your state. Both business structures protect owners from being held liable for the debts of their business.
However, while they are similar in some regards, there are big differences between LLCs and corporations, including the following:
- Their management structure
- Their tax obligations
- How they're owned
- Their reporting and record-keeping requirements
LLCs were first made available in the 1970s. Basically, LLCs are a combination of corporations and partnerships/sole proprietorships, providing the benefits of each of these legal entities. Because LLCs are a relatively new business entity, each state treats these companies differently. Although LLCs laws between states are often very similar, there can be enough differences that It may be more beneficial to form your LLC in one state than another. It is not possible to form a limited liability corporation.
Tax Entity vs. Legal Entity
A business's tax entity classification is how they are viewed by the state taxing board and the Internal Revenue Service (IRS).
A business's legal entity classification is how the business is viewed by the state, courts, and contractual partners. So, when a business incorporates, this is their legal classification, and their tax classification would be either an S Corp or C Corp. LLCs have the ability to choose their tax identity.
An LLC can choose to be taxed as the following:
- Partnership or sole proprietorship
What's the Difference Between LLCs and Corporations?
Not all of your options for incorporation are identical.
When you're trying to decide whether you should structure your business as a corporation or an LLC, it's important to consider which structure will help your business start strong while also putting it on the path of long-term success. Examining the fine details of corporations and LLCs demonstrates how complicated the differences between these structures actually are.
Seeking the advice of a knowledgeable attorney is probably the best way to choose between an LLC and corporation. While some business may want to learn about the fine details of each structure, this usually won't be a factor for the majority of businesses choosing between these entities. However you structure or organize your LLC, you will have flexible taxation options that may not be available to a corporation.
Corporations are legal entities that are distinct from their owners. The corporation and not its owners will be taxed for profits and losses. One of the biggest drawbacks of forming a traditional corporation is that it will be subject to double taxation. The profits of a corporation will be taxed once at the corporate level, and then shareholder dividends will be taxed on their individual returns.
If a corporation has fewer than 100 shareholders, they can elect S-corp status to prevent double taxation. S-corporations are allowed to pass profits and losses along to shareholders, who will report these items on their personal return. This prevents profits from being taxed at the corporate level. However, if they cannot meet the requirements, corporations will have to be treated as a C-corp, resulting in double taxation.
With an LLC, your tax structure will be much more flexible. Multi-member LLCs are automatically taxed as a partnership, and single-member LLCs are taxed as a sole proprietorship.
If you need help choosing between a limited liability company vs. a corporation, you can post your legal needs 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.