What do the initials LLC stand for? Is there a difference between a limited liability company and a limited liability corporation? Is an LLC even a type of corporation at all?
If you’ve found yourself asking these questions, you’ve come to the right place. In this article, we’ll discuss the basics of the LLC, from what the abbreviation means to how this business entity differs from a typical corporation. Read on if you need a refresher course on the LLC!
What Is an LLC?
It’s a pretty common misconception, so don’t feel bad if you’ve made it yourself: the abbreviation LLC stands for limited liability company, not limited liability corporation. In fact, the phrase “limited liability corporation” is a bit redundant, as all corporations provide personal asset protection, or in other words they limit your liability.
The limited liability company is a sort of hybrid business entity that bridges the gap between casual, unincorporated businesses like sole proprietorships and general partnerships, and the more formal nature of the corporation. An LLC takes the best of both worlds from these other business structures, pulling in the most popular elements of each, making the limited liability company a favorite choice of many entrepreneurs.
What Does an LLC Have in Common With a Corporation?
There is plenty of common ground between the limited liability company and the corporation. With either one of these business entities, you’ll enjoy the following features and advantages:
- Limited Liability Protection: The most important overlapping feature between the corporation and the LLC is the one that gives the LLC abbreviation its two Ls: limited liability. Both of these business structures provide personal asset protection, which means that in the case of a lawsuit against your company, creditors are not able to come after your personal possessions like your car, your house, and your personal bank accounts. Instead, those creditors are restricted to pursuing your assets only in the amount of your investment in the business.
- Business Name Reservation: These two popular business types also both lock down your business name, ensuring that only your company is able to use it. This may sound insignificant or even obvious, but it truly is a big deal. With a sole proprietorship or general partnership, you’ll need to register a doing business as (DBA) name if you want to use an assumed name, but a DBA doesn’t give you exclusive rights to that name. If you want to ensure that no one else can use your business name, you should form an LLC or corporation.
How Do LLCs and Corporations Differ?
There are also plenty of ways that the limited liability company and the corporation diverge in the ways they function. There are considerable differences in the way these two business entities are formed, as well as in the legalities of operation, the ownership and managerial structures, taxation, and more. Let’s walk through these differences one by one, discussing how these entities can affect the way you run your company.
- Forming the Business: The LLC is a far simpler structure to form than a corporation is, because the startup process is less complicated. All you need to do to form an LLC is prepare and file a brief document called the articles of organization. This document includes some vital details about your business, like your company name, your physical address, the identity and location of your registered agent, the nature of your business, and the names of your owners.
For a corporation, you’ll need to draft the articles of incorporation and file that document with your state government ― a step that’s quite similar to the LLC’s articles of organization. Beyond that though, a corporation needs to have bylaws that describe the inner workings of the business, and there needs to be an initial board of directors meeting to plan the company’s financial details. Finally, you’ll need to issue stock certificates to your initial shareholders.
- Legalities: The corporation has been around the American business landscape for centuries. As a result, this entity has well-established legal precedents, and the rules and regulations are uniform across the country.
LLCs have a trickier time when it comes to legal issues, partially because the limited liability company didn’t gain nationwide acceptance until 1996, and each state has its own laws for LLCs. Furthermore, because it’s a newer business structure, court systems haven’t had as much time to establish legal precedent for limited liability companies, which means that there are certain aspects that are still open to interpretation.
- Management and Membership: LLC membership is easy to comprehend, as the company’s members own the business themselves. LLC members have options for how to split up financial contributions and distributions, and they can also choose how they want management to function (either the members manage the company themselves, or they can hire an outside manager).
As for corporations, things get a bit more complicated. The ownership is comprised of the company’s shareholders, and there aren’t nearly as many options regarding management as there are with LLCs. The corporate managerial structure is rather rigid, and dictates that the board of directors handles big-picture management, while the corporation’s officers deal with the daily operations of the company.
- Taxation: This is another area where LLCs have options, but corporations don’t have that same flexibility. A corporation is either taxed as a C corporation or an S corporation. The C corp is more common because it doesn’t have as many eligibility restrictions as an S corp, but C corps are subject to “double taxation” because the corporation’s net income is taxed first at the corporate level, then again on each shareholder’s personal return.
The S corp avoids double taxation, as income is only taxed on shareholders’ personal returns and S corp dividends aren’t taxed, but these corporations can’t have more than 100 shareholders, cannot be owned by another business entity, can’t offer more than one class of stock, and can’t have any non-American shareholders.
When it comes to limited liability companies, there are three basic options for taxation. An LLC can choose to be taxed like a C corp or S corp, or they can elect the most common option, which is to be taxed like a partnership. This option is similar to S corp taxation in the way the money “passes through” the business structure itself, but without as many restrictions as the S corp has.
The phrase “limited liability corporation” is confusing in multiple ways. First off, the abbreviation LLC refers to limited liability companies, and also the term limited liability corporation is repetitive because all corporations include personal asset protection to begin with.
Beyond the semantics though, it’s easy to see that LLCs and corporations have many differences that could determine which of these business structures is the right option for your company. In general, an LLC is a much more flexible entity, with more choices available to its owners, whereas the corporation is more rigidly defined.
We hope this article helped you determine the important differentiating factors between LLCs and corporations, and we wish you the best of luck with your business!