Which is Better LLC or Corporation: Everything to Know
To ask which is better – LLC or Corporation – is a common question for new business owners as there are many advantages and disadvantages for both structures.3 min read
To ask which is better – LLC or Corporation – is a common question for new business owners. There are many advantages and some potential disadvantages to operating both types of business structures, and depending on the short and long-term goals you have for your business, one type of business might be a better fit than the other.
Corporation: An Overview
The owners in a corporation are referred to as shareholders. Corporations issue shares to the shareholders, who each own a portion of the business. For example, if the corporation sells 1,000 shares and you own half of the business, you will own 500 shares. The transfer of shares is rather easy and straightforward, as no formal paperwork is needed for transferring shares to another. While there is no paperwork required for the transfer of stocks, there is greater paperwork required when forming a corporation, particularly when it comes to corporate formalities and ongoing requirements. With that said, there are several benefits to operating a corporation, including the ability to expand your business by issuing stock to outside investors.
LLC: An Overview
The owners in an LLC (Limited Liability Company) are referred to as members. Each member will own a portion of the business, known as membership interest. Unlike corporate shares, there are generally greater restrictions on the transfer of membership interest. Some states have laws providing that absent an Operating Agreement, any member who wants to sell his or her membership interest will automatically cause termination of the LLC. However, most LLC members do in fact draft an Operating Agreement to set forth the rules and procedures for how membership interest can be transferred without dissolution of the company. However, while there are transfer restrictions in an LLC, there is great flexibility in its management structure, and it provides many other benefits for its members.
The LLC business structure offers many benefits to members. Some of the benefits include:
- Flexibility in management
- Pass-through taxation
- Few record keeping requirements
- Limited liability protection
The LLC offers great flexibility for members in terms of how they choose to manage the business. The members can choose to manage the LLC on their own (member-managed LLC) or hire someone else to oversee the business operations (manager-managed LLC). The members might also choose another member to manage the business. If the LLC members choose to hire a manager, they will no longer have total authority over the daily operations of the business. Rather, they will continue to have voting powers along with the control over significant business decisions.
The LLC operates as a pass-through tax entity, meaning that all of the LLC’s profits are passed onto the members who then report it on their personal income tax returns. This means that the LLC doesn’t pay corporate income tax.
The LLC also has very little record keeping requirements. Unlike the corporation, the LLC doesn’t require periodic meetings nor are there any legal requirements that the LLC keep meeting minutes of meetings that do in fact occur among members.
The LLC, along with corporations, provides limited liability protection for its members. Therefore, a plaintiff or creditor cannot go after the member’s personal assets in order to satisfy any outstanding debt of the business. Keep in mind, however, that exceptions do exist. For example, if a member engages in fraudulent activity or otherwise does something illegal that would cause harm to the business or a third party, then the member will be held personally liable. Furthermore, if a member personally guarantees a loan or holds the business out as his or her own, then personal liability could occur.
Advantages of a Corporation
There are also many advantages to operating a corporation, some of which overlap with the benefits offered by an LLC. The overall advantages to operating a corporation include:
- Simple transferability of shares
- Perpetual life
- Ability to obtain capital by issuing shares
- Limited liability protection
Shareholders can easily transfer their shares to others. Furthermore, the corporation, unlike the LLC, has a perpetual life as the transfer of shares doesn’t cause a dissolution of the business. In fact, the corporation could have an endless existence.
Since the corporation can issue shares, it can more easily obtain capital by selling shares to outside investors. And as previously noted, the corporation just like the LLC, offers limited liability protection to its shareholders.
If you need help choosing between an LLC or 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.