What Are the Differences Between a Corporation and an LLC?
The differences between a corporation and an LLC are important to understand if you register your business for the first time or changing business structure.3 min read
What Is Incorporation?
The two common ownership structures for this process are:
- Limited liability company (LLC)
- Corporation (corp)
As you work through your evaluation of business types, taxes are one of the big differences between S corps and C corps. In short, an S-corp is a "pass-through" tax entity (as are LLCs) whereas C-corps are taxed twice.
Know as double taxation, C-corps pay tax on company profits at a corporate level and then when profits or losses are paid out as dividends to individuals. Shareholders need to file the amount of dividends received on their individual tax returns.
Why Is an LLC not a Corporation?
You likely know LLC stands for limited liability company, but don't let this phrase confuse you. There is no such thing as a limited liability corporation.
An LLC is not a corporation. You register both a corporation and LLC with the state of your own choosing, but you don't "incorporate" an LLC.
How Are LLCs and Corporations Formed?
An LLC is formed by one or more owners who file Articles of Organization and create an operating agreement.
A corporation is formed by filing documents relevant to where the corporation is incorporating. Shareholders are then designated with a specific number of shares, and a board of directors is chosen to oversee major business decisions. The board, in turn, appoint officers to run the company.
Benefits of LLCs
LLCs protect owners, also known as members, since limited liability status prevents owners from being personally liable for LLC actions. This protection usually concerns lawsuits relating to the business.
LLCs also have a flexible corporate structure, which is a big benefit over corporations. Corporations generally have a set management structure including a board of directors and officers.
The pass-through tax entity status is great since LLCs don't pay tax at a business level. Any profits or losses are applied to personal tax returns.
LLC vs. Corporation: Business Ownership
An LLC is able to distribute ownership to its members without considering the investment each member made to the business, which is important when profits are distributed. One member may have made minimal start-up investment, but the LLC's operating agreement may state members receive an equal profit share. A C-corp could do the same in theory with a unique stock class. But an S-corp cannot create different classes of stock. They must have a single class of stock proportionate to the original capital investment made by each shareholder.
Anyone can act as the LLC's manager, and you don't even need to specify the difference between the owner and manager of the LLC. Corporate structure is fixed with the board of directors making the major management decisions and corporate officers running the business day-to-day.
Shareholders are the owners of corporations, but they're separated from the board of directors and officers, though they have voting rights. The main power they have is in electing directors.
LLC vs. Corporation: Legal Discrepancies
You could consider an LLC as the cool new kid in town, and the corporation an older, more routine classification that never goes away.
In courts, corporation cases have been resolved for centuries to create a guide for resolution. Financial planners can be more comfortable moving forward, knowing how different laws are applied.
Given that LLCs were first recognized in the 1970s, the same cannot be said for them. They're essentially a blend of corporations and sole proprietorships/partnerships and have taken on some characteristics of both.
As a result, different state courts have been treating them differently. Although LLC laws are similar from state to state, there are enough differences that a business might prefer to be a corporation in one state but an LLC in another. As LLC laws become more uniform, these differences may become less of an issue over time.
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