Why Choose LLC Over Corporation: Everything You Need to Know
This is a decision many business owners must make when determining the best way to protect their personal assets.3 min read
Updated November 2, 2020:
Why choose LLC over corporation? This is a decision many business owners must make when determining the best way to protect their personal assets.
One major consideration in an owner’s decision comes down to the type of business they intend to operate. They should take the time to consider the details involved in establishing and operating each and weigh their options carefully before proceeding in either case.
What Is an LLC?
An LLC is one of the newest types of business entities and has become a very attractive option for businesses in the early stages of operation. Each state may have different rules of incorporation for LLCs, so it may be advisable to seek the counsel of an attorney with experience setting up this type of business in your state.
As the name implies, limited liability means that that the owners or, in the case of an LLC, members, are not personally responsible for any debts the corporation may incur or for any liabilities resulting from lawsuits. As a legal entity, it shares this trait with a corporation. In an LLC, individuals with an ownership share are called members. In a corporation, they are called shareholders.
One of the advantages an LLC has over a corporation is that in many states, a creditor cannot collect a member’s dividends, whereas in a corporation dividends can be collected from shareholders.
Another benefit is tax entity classification. An LLC can have the option of choosing the form of tax entity it wants to be in the eyes of the IRS.
- It can be taxed as a sole proprietorship or partnership, and enjoy pass-through taxation, which means that if there is only one member, any profits (and losses) are passed-through to his or her personal tax return and no additional tax filings are necessary.
- On the other hand, that one member can opt to file business tax returns. If there is more than one member, the LLC must file a business tax return as if it was a C-corp or S-corp tax entity.
- A corporation, whether it has filed as an S-corp or C-corp, must file a business tax return.
Making a Distinction Between an LLC and S Corporations and C Corporations
In addition to taxation and legal status, there are a few other areas where LLCs differ from both forms of corporations.
- LLCs and C corps can have an unlimited number of members or shareholders. S corp ownership is limited to no more than 100 shareholders.
- Non-US citizens/residents can be members of an LLC or shareholders in a C corp. S corps may not have non-US citizens as shareholders.
- LLCs can be owned by a C corp, an S corp, a partnership, and even other LLCs. S corps cannot.
It is important that LLC members do not pierce what is known as the “corporate veil,” which means they must keep records and dealings separate from their personal affairs or risk the loss of the tax and liability protections that being an LLC provides.
In the business world, formalities are the basic and necessary rules that corporations are obligated to follow and LLCs are encouraged strongly to follow.
- S corps and C corps are required to adopt bylaws, issue stock, and hold annual director and shareholder meetings where meeting minutes are taken and kept with corporate records.
- It is recommended LLCs adopt an operating budget, issue and record membership shares, hold annual members meetings, and keep formal records of all major company decisions made by the members.
As a rule, operating an LLC requires a lot less oversight than running an S Corp or C Corp. There are fewer restrictions regarding record-keeping on the member level, it is easier to add new members or sell interest in the LLC to other people and if the members take an active role in the management of the LLC, the corporation is not required to file documents with the Security and Exchange Commission.
The existence of an S corp or C corp is perpetual, meaning its survival will continue beyond the death of any single shareholder, unless it is sold, goes out of business, or is dissolved by a vote of the shareholders.
The existence of an LLC is not perpetual, and especially in the case when it is owned and managed by a single member, it can cease to be upon the death of that member.
To learn more about why to choose an LLC over a 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.