LLC vs. Corporation: What's the Difference?
Figuring out what kind of business structure is best for your particular venture can be a difficult and time-consuming decision3 min read
Figuring out what kind of business structure is best for your particular venture can be a difficult and time-consuming decision. Two of the most popular and widely-used incorporated business structures are limited liability companies (LLCs) and corporations. Besides each being a separate legal entity, there are major differences between the two when it comes to taxation, legal structure, and administrative responsibilities. In this article, we’ll outline the differences between LLCs and corporations so that you can make an informed decision as to which business structure is best for you.
LLC vs Corporation: What Is an LLC?
A limited liability company, or LLC, is a business type that combines the features of a corporation with those of a partnership or a sole proprietorship. LLCs are separate legal entities that help to protect business owners from personal liability and offer a range of tax flexibility and other benefits. An LLC must typically have at least one managing member, with other members not required. It can be managed by one or more of the members, but the operating agreement can also designate non-members to act as officers and managers.
LLC vs Corporation: What Is a Corporation?
A corporation is a separate legal entity from its owners, separate and distinct from the individuals or other legal entities that hold shares of stock in the company. Corporations enjoy much more wide-ranging legal powers than other business types, including the ability to issue stock, hire officers, sue and be sued as a separate entity and engage in other business activities. Corporations can have both large and small shareholders as part-owners, and any profits or losses are treated as separate items when calculating taxes.
LLC vs Corporation: What Are the Major Differences?
Perhaps the most obvious difference between LLCs and corporations is how they are managed and taxed. LLCs are relatively straightforward to maintain and are typically taxed as a partnership, while corporations can have complex management and taxation structures.
Both LLCs and corporations provide limited liability protection to their owners, protecting their business and personal assets from liabilities and legal actions directly related to the business. This means that the owners are not personally liable for any debts, losses or liabilities of the LLC.
LLCs are typically managed by members of the company, although they can also appoint officers and managers to run the day-to-day operations. Corporations, on the other hand, generally have an appointed board of directors who oversee the company’s activities.
LLCs offer limited members the ability to choose how the company is taxed. They can be taxed as partnerships or as a corporation. This can provide the LLC members with more tax advantages than a corporation. Corporations, however, are required to pay corporate income tax and, depending on its size, may also pay federal unemployment taxes as well as state and local taxes.
Filing costs for LLCs and corporations can vary significantly. In most states, the filing fees for LLCs are much lower than those for corporations. Additionally, the cost to maintain a corporation can be more expensive than an LLC; corporations typically require more paperwork and must install a formal board of directors and legal officers.
LLC vs Corporation: Which Is Right for You?
When deciding whether to form an LLC or a corporation, there is no one-size-fits-all answer. Each business type has advantages and disadvantages, and the one you select should be based on the specific needs of your business. Additional factors you should consider include liability protection, taxation, management structure, and setup and maintenance costs.
Before making a decision, you should be sure to do your research and consult with a business attorney. A business attorney can help you to evaluate the pros and cons of each business structure and advise you as to which one may be best for your particular needs.