We won’t mince words here: choosing a business structure is a big decision. It dictates how your business operates, the protections it receives, and how it’s taxed, to name a few implications. But this can be a good thing too. Having options for your business type means that you can choose the one that’s best suited to your business goals, preparing it for long-term success.
Both of these business types are highly popular with American entrepreneurs and have track records of stability and achievement. While they have quite a few similarities, there are also some crucial differences that set them apart.
By putting a magnifying glass to these similarities and differences, you can weigh the pros and cons, evaluate each type, and effectively determine which one is best for your company. We’ve compiled all the essential facts right here, so read on, and by the end of this guide, you’ll be ready to confidently dive into your new business.
Common Characteristics of LLCs and Corporations
Limited liability companies and corporations are fairly similar, but they’re not exactly siblings. They’re more like cousins. They aren’t exactly the same, but there’s a decent amount of crossover, so no matter which one you choose, you can enjoy some of these features.
Personal Asset Protection
Take a look at your personal possessions – your house, car, savings, vintage baseball card collection. They’re precious to you, and you wouldn’t want a creditor taking them. With both of these business types, you won’t have to worry about that because they limit your liability as a business owner. This means that if your company is sued, creditors can only pursue your business assets, not personal ones. Sole proprietorships and general partnerships, don’t offer this kind of protection, so your personal possessions would be fair game if your business is sued.
Business Name Uniqueness
Worried that someone might steal your clever business name? If you run an LLC or corporation, that name is yours and yours alone. Because it’s registered with the state, no other businesses are allowed to use it. This is a great way to protect your company’s reputation and prevent anyone else from trying to profit off of your hard work.
Major Differences Between LLCs and Corporations
The two overarching similarities are important, and reading them might have convinced you that your business needs a formal structure. Now it’s time to dig into the details, really look at what makes LLCs and corporations tick, and what sets them apart. Evaluating these fundamental differences should give you a good idea about which might be a better fit for your unique company. While this isn’t an all-encompassing list, these are the most important differences between the LLC and the corporation.
Right from the state, you’ll notice distinctions in the formation process, and big ones at that. The LLC formation process is rather simple and straightforward, and it doesn’t often come with exorbitant fees. By contrast, forming a corporation takes much more time and effort, and the fees associated with doing so are typically much higher.
Let’s take a look at each formation process to highlight these differences.
Limited Liability Company: The key to forming an LLC is a document called the Articles of Organization, which you’ll file with your state. This document varies in appearance and structure from state to state, but you’ll typically need to include your business name and physical address, the name and address of your registered agent, a description of the nature of your business, and the names of your LLC’s owner/members. The Articles of Organization is pretty quick and painless, and what’s better is that after you’ve completed it, all you need to do is submit it to your state.
Corporation: Starting a corporation is decidedly more complicated. Typically, the process includes:
- Articles of Incorporation: These documents are pretty similar to the Articles of Organization. You’ll need to include your company’s name, the duration of your corporation’s intended lifespan, the purpose of your business, the identity and location of your registered agent, the class of stock and number of shares issued, and the identities of your directors and officers.
- Corporate Bylaws: Don’t breeze through these, because they dictate how your corporation will operate. Shareholder meetings, Articles of Incorporation amendments, recordkeeping, procedures for officers, and more – it’s all included here. Make sure your bylaws are detailed and specific!
- Hold a Board of Directors Meeting: This initial board of directors meeting needs to determine the company’s fiscal year, how stock will be issued, whether the corporation will be an S corporation or C corporation, and other important topics.
- Issue Stock Certificates: Before you conduct any business as a corporation, you’ll need to formally divvy up your company’s ownership.
It’s clear that LLC formation is much less intensive, but don’t make a decision based on that alone. There are still other factors to consider.
Each business structure is treated somewhat differently by the state and federal governments, largely due to a difference in the amount of legal history behind them.
Limited Liability Company: All things considered, the LLC is the new kid on the block among other business structures. In fact, it wasn’t adopted in all 50 states until 1996. Because of this, there’s not a whole lot of legal precedent for the way courts treat LLCs, so there’s some wiggle room for interpretation. Consequently, there are different rules and regulations for forming and maintaining LLCs in each state.
Corporation: If LLCs are the new kid on the block, corporations are the wise old neighbor. This business structure is hundreds of years old, so its legalities are firmly entrenched. You don’t see the same state-to-state variance present for LLC laws. Corporation laws are the same nationwide, which can be quite convenient when expanding your business.
Ownership and Management
This is an absolutely crucial step in setting up your business. Your company’s ownership and managerial structure influence the rest of its operations, so it’s vital to find the right business type.
Limited Liability Company: LLC ownership is rather simple: limited liability company members own the company, and they can split profits however they’d like. When it comes to management, you have two choices. Either the members can handle management duties, or you can hire managers from outside the ownership group.
Corporation: This is where it gets a bit more complex, but that’s not necessarily a bad thing. A corporation’s ownership group consists of its shareholders, and without stock certificates, there is no claim to ownership. This presents a significant departure from the LLC management structure, as corporations have a stricter managerial framework. The company’s board of directors takes care of major managerial issues, and corporate officers handle the day-to-day minutiae.
Considering these major differences, you might take a moment to write out your business goals and intended procedures. Then, you can effectively evaluate whether an LLC or corporation might be a better fit for your unique circumstances.
How Are LLCs and Corporations Taxed?
You may remember that there are two different types of corporations: S corporations and C corporations. Everything we’ve told you about corporations to this point applies to both, but here is where the path diverges. Drawing comparisons between these two types of corporations and LLCs is difficult because LLCs can choose how they want to be taxed, but let’s dig into the details and see what we find.
Limited Liability Company: By far the most common form of taxation for an LLC is the “pass-through” model used by partnerships. In this model, the company’s profits and losses aren’t claimed on a business tax return. Rather, owners/members declare them on their personal returns. The nice thing about LLCs, however, is that they’re flexible, so you can also choose to have your company taxed as a C corporation or an S corporation if you’d prefer.
C Corporation: Most corporations are C corps because they’re easier to form and maintain. They don’t need to comply with nearly as many regulations as S corps. The C corp is subject to what’s known as double taxation, where profits are taxed at the corporate level, then again on shareholders’ personal returns.
S Corporation: If a corporation has fewer than 100 shareholders, only has one class of stock, is not owned by another business, and has no foreign shareholders, it may elect S corp taxation. This is almost always preferable to the C corp because it adopts a pass-through model like the one used by LLCs, and the dividends of an S corp are not taxable.
When selecting a structure, don’t forget about taxes! Choosing the type that best fits your business could save you from undue hassles and payments come tax time.
That’s a lot to chew on. So, step back, take a deep breath, and take stock of all the variables. Choosing a structure depends largely on what’s best for your business, but generally, corporations are the better choice for large companies, while the LLC fits best with small-to-midsize businesses. There are, of course, exceptions to these generalizations.
Many of the differences between these business structures come from the fact that the LLC is a more recent development, and it has different rules and regulations depending on which state your company resides. On the other hand, the corporation is a steady, long-standing business form with plenty of history and precedent.
Equipped with the knowledge in this guide, you’re ready to make a thoughtful, well-informed decision about your business type. Whichever you choose, it’s an exciting first step in what will hopefully be a long and prosperous business journey.