As you select a legal structure for your business, you may find yourself choosing either the corporation or LLC (limited liability company). These are the two most common legal entities for a new business, and this post will compare them, allowing you, the business owner, to decide which is better.
Please note: to get an overview of all entities, please visit, “Business Entity Comparison.”
First, let’s check out the two major similarities between an LLC and a corporation.
1) Limited Liability Protection: As long as the entity is in good standing, both structures offer limited liability protection, unlike a sole proprietorship or a general partnership. In the event of a lawsuit, only the business’ assets, and not the owners’ personal property, can be targeted and seized.
2) Name Reservation: Both LLCs and corporations are registered with the state’s Corporation’s Division. Once your initial filing is approved, another company in the same state cannot register the name of your business. If your entity falls out of good standing, or is dissolved, the entity name may become available once more.
Now let’s explore how these two entities differ. That’s why you’re here, right?
1) Registration with the State: Registering an LLC with the state is termed “formation” or “organization.” Registering a corporation is termed “incorporation.” Consequently, you’ll file “Articles of Formation” or “Articles of Organization” for your LLC, and “Articles of Incorporation” for your corporation. Make sure you prepare and file the correct form(s).
2) Ownership: On one hand, an LLC is owned by members, which is detailed in the LLC operating agreement, and often evidenced by “membership certificates.” On the other hand, a corporation is owned by shareholders. A corporation issues stock to shareholders investing in the company in anticipation of profit. For a small, private company, there may be only a handful of shareholders. For a large, public company, that number may be in the thousands or millions.
3) Taxation: By default, an LLC is taxed as a sole proprietorship or general partnership, which means the owners declare business profits on their annual 1040 (Schedule C). A corporation is taxed as a C-Corporation, which is the classic double-taxation model. Profits are taxed at the corporate level, and then dividends are taxed a second time at the shareholder level.
4) Ongoing formalities: Generally speaking, an LLC is simpler to run than a corporation. For example, a corporation must draft bylaws, and hold an annual shareholders meeting, whereas an LLC must not. Additionally, there may be state-specific requirements for both entities. Franchise and annual taxes are common, and in some states, such as California ($800), are quite expensive. Before you register your business, research the ongoing activities you must complete, in order to stay in good standing.
So which is better?
Neither is outright “better.” The decision between a corporation or LLC should be based on your activities, mission, and plan for growth. However, here are three things to consider:
1) Are you seeking venture capital?
Are you planning on seeking venture capital, to go public, and to explode onto the market? An LLC does not permit a limitless number of shareholders, and many venture capitalists will not consider an LLC as a candidate for funding.
2) How large will you be?
Similarly, many “solopreneurs” and small business owners find that the tax structure and the formalities of a corporation are incongruent with their resources and goals. An LLC offers liability protection and fewer ongoing responsibilities for smaller organizations.
3) Anything relevant to your situation
You’ll find tons of pages, like this one, telling which entity to choose. However, we’re not psychics, and don’t know everything about your business. Hopefully, the information provided above is enough for you to make an informed decision on your own.