Profit Corporation vs LLC

When it comes to profit corporation vs. LLC, LLC entails less paperwork and less maintenance. However, corporations and limited liability companies share similar attributes, such as affording certain protections to its owners.

Both entities protect members from personal liability in the event of a bad deal or wrongdoing on the part of the organization. Owners are protected because both legal entities comprise separate institutions from its members.

To create an LLC or corporation, an owner must file the necessary paperwork with the Secretary of State of his or her state and pay any fees involved. With that, a corporation filing may need additional paperwork when compared to an LLC.

Before you decide to form an LLC or corporation, consider the following:

  • Getting a lawyer who has experience in areas pertaining to legal entity filings. Attorneys will weigh the pros and cons of an LLC or corporation on your behalf, depending on your individual needs.
  • Hiring a Certified Public Accountant (CPA) who realizes the tax structure of each entity.

Before assessing the right entity for you, it is important to know the different legal and tax entities. For instance, a legal entity would be a corporation or LLC, while tax entities include sole properties/partnerships, S-corporations and C-corporations. State bodies in the form of courts or state governments view a business entity from a legal standpoint.

Tax entities are labels the IRS uses to structure appropriate tax codes for each business entity. For additional subcategories, the IRS labels corporations as classes C or S to fit in a particular tax category. 

With that, LLCs can decide what type of tax classification is best for the company. For instance, LLCs can be created as a sole-proprietorship, partnership, C-corps or S-corps. LLCs are given tax leeway because they are not viewed as a tax entity, but rather a traditional tax structure.

Ownership Structure

LLC members are also called owners, while corporate owners are known as shareholders. In addition to individuals, LLCs allow corporations, other LLCs and foreign companies to become members. An LLC also allows an unlimited amount of members to own the company.

On the other hand, a corporate structure comes with certain limitations. One example is the c-corps, where the entity pays annual taxes on profits and can divide remaining profits to shareholders. C-status entities also allow other corporations, LLCs, and foreign buyers to become shareholders. Like LLCs, however, c-corps allow an unlimited number of shareholders. However, s-status corps restrict corporate ownership to U.S. residents only, and ownership numbers are capped at 100.

LLCs are slightly more advantageous in the sense that members get to distribute shares to members without regard to a recipient’s contribution level to the company. Moreover, an LLC’s operating agreement may stipulate that all members receive equal shares regardless of contribution.

Corporations may choose the same structure, but such a choice is only available to c-status corporations. S-corps that wish to dodge double taxation cannot establish a unique stock disbursement system. S-corps are only given a single stock classification where divides must be allotted according to a shareholder’s individual investment. Therefore, corporations that have a unique stock system must face double taxation.

Corporate Structure

The creation of an LLC entails the creation of an operating agreement and articles of organization. Such documents outline the management structure of the business, and LLCs have a centralized management system when compared to corporations. A member of the LLC can sit as acting manager, and other structures allow no distinction between managers and owners. LLC managers can employ other managers to reside over daily operations, but other members can manage daily affairs as well.

Corporate Structure

Corporations are formed through paperwork filed in your respective state. Moreover, corporations can establish bylaws that establish the structure of the organization. Paperwork should include such vital information as where the business is located and any allotted shareholders to each owner.

Corporations come in three brackets: directors, officers, and shareholders:

  • Shareholders: Owners who have purchased a certain number of shares in the business. They are entitled to certain benefits in the form of one vote for each share and pro rata dividend shares, meaning that they are entitled to dividends amount based on how much he or she invests in the company.
  • Directors: Board of Directors are responsible for handing out shares accordingly. Shareholders do not participate in day-to-day operations, but they are responsible for making major management decisions and electing company directors.
  • Officers: Officers come in the form of CEOs or CFOs and manage the daily operations of the business. They answer to shareholders, and shareholders can be appointed officers or directors.

To learn more about profit corporation vs LLC, submit any questions or legal needs on the UpCounsel marketplace. Our pool of lawyers have the experience and passion you need to find the best option for you and your business. We will guide you through any guidelines or laws to keep your business current so you can focus on making your LLC healthy and successful.