LLC vs. Corporation: Which Structure is Right for You?
The decision to form a limited liability company (LLC) or a corporation depends on a number of factors. You’ll need to consider the type of business you’re looking to start, potential tax consequences, legal liability, and more.
To make the best decisions for your business, you’ll want to have all of the facts. Let’s take a look at some of the similarities and differences of an LLC vs. corporation structure and how you can determine which entity structure is right for you.
LLC vs. Corporation Comparison Chart
Take a look at the comparison chart below to get a side-by-side look at how the structures of an LLC vs. corporation compare. With those comparisons in mind, you’ll be able to make a more informed decision when choosing an entity structure for your business.
|LLCs have a simple management structure.||Corporations have a formal management structure.|
|LLCs have fewer record-keeping requirements but are still bound by the laws of their domicile.||Corporations are required to hold annual shareholder meetings and document the sessions via corporate minutes.|
|LLCs can be taxed in one of four ways: sole proprietorship, partnership, C corp, or S Corp.||Corporations are taxed as C corps or S corps.|
|Legal provisions protect an LLC member from losing ownership or company assets in a personal lawsuit.||Creditors can seize shareholders’ stock and company assets in a personal lawsuit.|
Limited Liability Companies
An LLC lets business owners enjoy some of the benefits of sole proprietorships and partnerships (such as a pass-through tax structure) and some of the limited liability advantages offered to corporations. The formation of an LLC begins with articles of organization and an operating agreement.
LLCs are typically a good choice for medium - or higher - risk businesses, as well as for potential owners who are looking to protect their personal assets. Your personal finances stay protected regardless of how your business performs, and profits and losses get processed through your personal income.
Ownership & Management
With the freedom to distribute its ownership stake to members without worrying about members’ financial contributions, LLCs have additional flexibility to establish ownership of the business. LLCs can also be owned by foreign individuals, other corporations, or a trust. The operating agreement explains how membership interest is transferred between members and what happens if a member leaves the company. Note that if a member leaves an LLC and the process is not outlined in the operating agreement, the business must be dissolved.
In terms of management structure, LLCs are flexible. Entities can be managed by members or a group of managers. Any member may act as the LLC’s manager. The LLC may also elect to have no distinction between an owner and the manager, depending on the business. This informal type of management is ideal for some entrepreneurs.
LLCs are required to fulfill reporting requirements as established by the state where their entity was formed. However, LLCs have fewer record-keeping requirements compared to corporations. LLCs are not required to keep minutes or hold annual meetings. Some states require annual reports, while others do not.
As mentioned, an LLC is taxed as a pass-through entity. This means that business profits and losses are reported on the owners’ individual tax returns instead of the business level. Filing taxes is often simpler for LLC owners, and any operating costs can be deducted to help offset other income.
The taxation rate for an LLC depends on the total income of the owner. Owners may be required to pay self-employment taxes or a franchise tax, depending on the nature of the business. LLCs may also elect to be taxed as a Corporation.
Compared to the corporate entity, the LLC is still considered new in some regard. The entity type was first recognized in the 1970s as a merger of the corporate and sole proprietorship forms. The dual nature allows LLCs to take on the characteristics of both entities. In terms of liability, provisions protect an LLC member from losing ownership or assets in a personal lawsuit.
If your business involves complex ownership arrangements or you plan to earn substantial revenue immediately, a corporation is likely the structure for you. Corporations are defined by articles of incorporation and bylaws. Those rules are created by the board of directors.
Ownership & Management
Corporations can issue shares of stock and sell percentages of the business to its owners. The owners are referred to as shareholders. Shareholders are allowed to transfer shares, purchase additional stock to own a more significant percentage of the company, or sell stock to reduce ownership. Corporations exist in perpetuity and separate from the owners, which means the business can remain in existence even if the individual owners leave or divest.
Regarding management, the corporate structure is considerably more strict than that of an LLC. Corporations are required to have a board of directors to handle management responsibilities like generating profits. Corporate officers are assigned to the day-to-day tasks of operating the business.
While shareholders are considered owners, they typically remain separate from business decisions and daily operations. However, shareholders have the ability to elect directors. Individual shareholders can be elected as a director or to be appointed as an officer. The board completes the process of incorporation to establish the bylaws. Written bylaws explain how an organization is to handle new issues or situations to save time and money in the future.
Corporations are also required to fulfill certain business maintenance requirements as set by the state in which they operate. Unlike an LLC, a corporation is required to hold an annual shareholder meeting. The details of the meeting are documented in notes called corporate minutes. Annual reports are also typically required.
Corporations can be separated into two tax classifications based on tax elections. A C-corp allows the business to be separate from its owners. A C-corp can make a profit, pay taxes, and be held legally liable. One of the benefits of a C-corp is the protection it affords its shareholders in terms of personal liability.
Another type of tax election is an S-corp. This particular type of tax election avoids double taxation by allowing profits and losses to pass through to the shareholders’ personal income without being corporately taxed.
Corporations have existed for as long as US history. As a result, there are uniform laws in place. Centuries of legal disputes and their resolutions contributed to those laws. Regarding liability, creditors can seize shareholders’ stock and company assets in a personal lawsuit.
Which Entity Structure is Right for Your Business?
An LLC could be the best structure for your business if you’re not looking to attract investors, you’re looking for an easy to maintain form, and you want to invest most of your profit back into your business every year.
While most small businesses start as limited liability companies, there are instances where starting as a corporation is best. If you need to attract investors, you will benefit from a more complex business structure. If you’re looking to carry significant profit over from tax year to tax year, a corporation is in your best interest. Limited liability companies are ideal for holding passive investments because there is no tax at the company level, and deductions flow through. At the same time, corporations are suitable for companies that intend to go public and sell stock.
Ultimately, deciding which entity structure is best for your business is primarily based on factors regarding profits, business type, and investments. LLCs have a simple management structure, ownership is distributed freely, and members do not need to worry about double taxation on salaries. A corporation has a formal management structure, ownership is represented by stock, and while double taxation can be present, there may also be tax-deductible fringe benefits.
If you are looking for guidance on starting a business and are uncertain about which entity type of right for you, Harbor Compliance can help. Regardless of the type of entity you create, we offer a range of business compliance services to ensure you’re able to maintain good standing in the states where you operate. Contact us today to learn more.