1. What Is Incorporation?
2. What Is a Limited Liability Company (LLC)?
3. Advantages of an LLC: Flexibility in Management
4. Advantages of an LLC: No Ownership Restriction

When doing an LLC and corporation comparison, it's important to know which facts to look at.

What Is Incorporation?

When incorporating a business, a sole proprietorship or general partnership evolves into a company that becomes recognized formally by the state where it was incorporated. This means it becomes its own legal business entity. The new structure of the company usually falls into one of two categories: a corporation or a limited liability company. Limited liability companies can either be structured as a C corporation or an S corporation.

Some benefits can be expected no matter how the business is incorporated. This includes having improved credibility with customers and being protected from personal liability. However, there are disadvantages and advantages associated with each type of incorporation. Deciding to form a corporation or LLC needs to be carefully considered among the business owners.

Picking the right business structure for your company will depend on what its operational needs are, what kind of business it is, and its tax strategy. There are also different documents that must be filed for each business type.

For example, Articles of Organization must be filed for LLCs and Articles of Incorporation must be filed for corporations. These will be filed with the state agency. LLCs and S corporations are normally used for small business activities. There are several similarities between the two, including the following:

  • Both of these allow the business to grow and have new owners.
  • Both pass through income to the owners, who report it on their individual tax returns.
  • Both are roughly the same amount to set up initially (depending on ongoing fees and filing fees for the state they're incorporated in).

What Is a Limited Liability Company (LLC)?

A limited liability company, or LLC, is a type of business that is formed under state law and gives its members' liability protection. This can be formed by one or more people, who are called the owners. The owners, also known as members, must file Articles of Organization and define the operating agreement. An LLC has the same tax liabilities as an S corporation. Any business expenses and income are reported on the owners' personal tax return.

If there is only one owner of the LLC, they are a disregarded entity. This means they must report the income and expenses of the company on Schedule C of Form 1040. This is the same schedule that sole proprietors use. All members of an LLC are self-employed individuals who still owe Medicare and Social Security taxes.

An LLC could be the right business structure if the company assumes they'll have losses for a minimum of two years and they want to pass those on to themselves and the other owners. The LLC structure also provides more flexibility when it comes to accounting. LLCs don't have to use the accrual method as C corporations do. An LLC can also own real estate, and the management and profit sharing structures are flexible.

Advantages of an LLC: Flexibility in Management

There is a set management structure in corporations where directors are in charge of all large business decisions. Officers manage the day-to-day operations of the business. There is not the same formal structure for management in LLCs. Corporations need to hold meetings on a regular basis of the shareholders and board of directors, have written corporate minutes, and file yearly reports with their state of business. Managers and members of an LLC do not need to have regular meetings, which cuts down on paperwork and complications.

Advantages of an LLC: No Ownership Restriction

S corporations can't have more than 100 shareholders in their business. Every shareholder must be a U.S. citizen or resident. S corporations can't be owned by LLCs, non-qualified trusts, other S corporations, or C corporations. However, LLCs have no such restrictions.

C corporations typically use the accrual method for their accounting, but most LLCs can use the cash method instead. This means income won't be earned until it's received. LLC members can put their membership interests into a living trust, which would raise suspicion in an S corporation.

If you need help deciding whether an LLC, S corporation, or C corporation structure is right for your business, 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.