LLC Corp: Everything You Need to Know
An LLC Corp is a limited liability company that might choose to convert to a corporation for various business reasons.3 min read
An LLC Corp is a limited liability company that might choose to convert to a corporation for various business reasons. When initially forming your business, you might not be sure of what type of business structure to operate. Therefore, you’ll want to gain a better understanding of the advantages and potential downsides to operating each type of business.
LLC: An Overview
An LLC operates similarly to that of a corporation and partnership. It offers the corporate advantage of personal liability protection and the taxation benefits of a partnership.
Generally, small business owners choose to form an LLC instead of a corporation due to the flexibility in how the LLC can be managed. Furthermore, the LLC can have one member (single-member LLC) or several members (multi-member LLCs).
Incorporating Your Business
If you want to incorporate your business after operating as an LLC, sole proprietorship, or general partnership, you can do so by following certain steps. Even if you have just formed your business, you might choose to incorporate, especially to take advantage of the benefits that an S corporation offers.
The corporation itself can be created as a default C corporation or an S corp. There are certain requirements that must be met in order to operate as an S corp. Most small businesses that want to incorporate will elect to be treated as an S corp due to the many benefits it offers. S corps do, however, have certain ownership restrictions.
Similarities in the LLC and Corporation
There are many similarities between an LLC and corporation, including the following:
- Limited liability protection
- Separate entities
- Pass-through taxation
- Ongoing state requirements
As previously noted, the LLC and corporation share the advantage of limited liability protection for its owners. This means that the owners cannot be held personally liable for the debts and obligations of the business. The LLC and corporation operate as separate and distinct legal entities from their owners, which is actually why both business structures offer limited liability protection.
The LLC and S corporation share the pass-through taxation benefit. This means that the profits and losses of the business pass through to the owners who will report it on their personal income tax returns. While these entities are not required to pay corporate income taxes, they still must file an informational tax return which specifically identifies the percentage that each member is responsible for. Both LLCs and corporations have their own unique ongoing state requirements, such as annual filing, reporting, and applicable fees.
Differences in the LLC and Corporation
With the similarities come some differences too. Particularly, the Internal Revenue Service (IRS) places restrictions on S corporation ownership. However, the IRS doesn’t place such restrictions on C corporations or LLCs. The restrictions for S corporations include the fact that they can’t have more than 100 shareholders; LLCs can have an unlimited number of owners (members).
The IRS also provides that S corporation shareholders must be U.S. citizens or permanent residents. However, LLC members need not be U.S. citizens, as foreign nationals are allowed. S corporations can’t be owned by other businesses, whether it is other corporations, LLCs, partnerships, sole proprietorships, trusts, and the like. LLCs are not limited by this restriction. LLCs can also have subsidiaries with no restrictions, whereas S corporations cannot.
Corporations have extensive formalities whereas LLC have much fewer formalities that must be adhered to. This is why LLCs are viewed as highly flexible, as the owners can choose to manage the business how they choose.
The formalities of operating a corporation include the following:
- Adopting bylaws
- Issuing stock
- Holding initial meeting
- Holding annual director and shareholder meetings
- Keeping meeting minutes from all meetings
These formalities are required of corporations, regardless of whether the business is operating as a C or S corp.
The formalities for LLCs are not required but more so recommended and include the recommendation that an LLC should draft an Operating Agreement, issue membership shares, hold member meetings, and document all significant business decisions.
LLC owners can choose to oversee the business themselves (member-managed LLC) or have a third party manage the daily affairs (manager-managed LLC).
If you need help learning more about the similarities and differences between an LLC and 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.