What do the initials LLC stand for? You might think it’s a trick question, especially if you’re unsure about the differences between a limited liability company and a corporation. Many people think the two are synonymous, that a limited liability company is just another way of saying a limited liability corporation.
It’s easy to get lost in a tangle of semantics and terminology, so let’s take a step back for a second, rewind to the very beginning, and go over the basics of these two business types.
Whether you’re brand new to the world of LLCs looking for some foundational information, or you’re a seasoned entrepreneurial veteran just looking for a refresher, you’ve come to the right place. Here, we’ll outline the differences between LLCs and typical corporations, laying out everything you need to know before deciding between the two.
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, 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 corporation. Like an adorable labrador-retriever mix, the LLC takes the best of both worlds to form something potentially even better, which is why so many entrepreneurs favor it.
What Does an LLC Have in Common With a Corporation?
Limited liability companies and corporations aren’t polar opposites, though. They actually share a lot of common ground. Both offer the following perks:
Limited Liability Protection: The most important overlapping feature between the corporation and the LLC is the one that represents the “LL”: limited liability. Both of these business structures provide personal asset protection, which means that your possessions are sheltered from creditors if your business gets sued. So, if the court rules against you, your house, car, personal savings, etc. will be off-limits. Instead, the creditors will be confined to pursuing your business assets only in the amount of your investment in the business. It’s not fun to think about these things happening, but it’s even less fun to be in that situation without limited liability protection.
Business Name Reservation: If you had a stroke of genius and came up with a unique, clever business name, you’ll probably want to protect it. After all, if another business swoops in and uses it first, tough luck. Both the LLC and corporation give you sole ownership of your business name, which is a big deal. Sole proprietorships and general partnerships need to register a doing business as (DBA) name to use assumed names, but a DBA doesn’t provide exclusive rights to that name. To truly claim that perfect name for yourself, you need to include it on your paperwork when you form your LLC or corporation.
How Do LLCs and Corporations Differ?
For every place where the LLC and corporation converge, there seem to be a few others where they stand apart. Formation procedures, legalities, ownership, managerial structures, and more – there are considerable differences between them. This doesn’t mean, however, that either one is good or bad. To each their own, as they say. While an LLC might be ideal for one business, a corporation might be the right move for another. Let’s put these differences under a microscope.
Forming the Business: You shouldn’t choose a business type by how easy the startup process is. That said, formation procedures are much simpler for LLCs than corporations. When forming an LLC, all you need to do is prepare and file a brief document called the Articles of Organization. While the form varies from state to state, it typically includes your company name, physical address, your registered agent’s name and address, the nature of your business, and your owners’ names.
But if you choose to form a corporation, prepare yourself to go through a few more steps. First, you’ll need to complete the Articles of Incorporation and file it with your state government ― a step that’s quite similar to the LLC’s Articles of Organization. Beyond that, a corporation needs to draft bylaws that describe its inner workings, and you must hold an initial board of directors meeting to plan the company’s financial details. Finally, you’ll need to issue stock certificates to all of your initial shareholders. Even though the formation process is a bit more complicated, don’t let it deter you if you believe that a corporation is the right fit for your business.
Legalities: Corporations have been present in America for just about as long as it’s been a nation. The first corporations appeared in the 1790s, and they’ve stuck around ever since. As a result, this entity has firmly entrenched legal precedents, and their rules and regulations are uniform across the country.
As a much younger business structure, LLCs don’t have this benefit. In fact, limited liability companies weren’t accepted in all 50 states as a legitimate business type until 1996. And even now, each state has its own unique LLC laws. Courts had a 200-year head start in establishing legal precedents for corporations, so younger sibling LLC still has certain legal aspects that are open to interpretation.
Management and Membership: LLC membership is pretty simple – the members are the company’s owners. LLC members have options for how to split up financial contributions and distributions, and they can also choose their managerial structure. Members can, if they’d like, take on management responsibilities themselves. Or, if they’d rather not deal with the day-to-day operations, they can delegate those duties to outside managers.
With corporations, things are a bit more complicated. Corporation ownership is comprised of the company’s shareholders, and there aren’t nearly as many management options. The corporate managerial structure is rather rigid – it dictates that the board of directors handles big-picture management, while the corporation’s officers deal with the company’s daily operations.
Taxation: This is another area where LLCs have flexibility, but corporations don’t. 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,” where 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. However, these corporations cannot have more than 100 shareholders, be owned by another business entity, offer more than one class of stock, or have any non-American shareholders.
An LLC gives you three basic options for taxation. By default, LLCs are taxed like sole proprietorships or general partnerships. They don’t need to pay a corporate income tax. Instead, the LLC’s owners will report business income and losses on their personal tax returns. But if the owners prefer, they can elect to have their LLC taxed like a C corp or S corp. It’s a nice option, because it allows you to choose the tax structure that best fits your business and financial planning.
Which Should I Choose?
There’s not a single right answer to this question. Choosing a business type is a decision that comes down to your specific business. Would your business benefit from a flexible managerial structure? Would you rather it not pay a corporate income tax? Are you looking for a simple startup process? Then an LLC might be the best route. But if you like rigid structure and established legal precedents, a corporation might be better.
If you could go either way, we suggest going with an LLC, as it’s easier and less expensive to get started, plus it offers a lot more flexibility in numerous aspects. Need help with formation? Online incorporation services can take care of the entire process for you for a reasonable fee. Plus, some include registered agent services and ongoing compliance, so you won’t have to worry about staying on top of your state’s maintenance requirements. If you’re interested, we recommend checking out ZenBusiness or IncFile.
LLCs and corporations are fairly different structures, and the one you choose can have a significant influence on the life of your business and your responsibilities as an owner. In general, an LLC is a much more flexible entity, with more choices available to its owners, whereas the corporation is more rigidly defined. Both options have their advantages, and it all comes down to your specific business priorities and goals.
Evaluate your options carefully and continue researching business structures as you prepare to start your business. And when you’re ready to take the first step, remember, you’re totally capable of tackling it on your own, but there’s always help available if you need it!