LLC vs Corporation: What Is the Difference?
Are you interested in forming a new business, but you’re not sure whether the limited liability company or the corporation is the right structure for your business? Both of these business types are highly popular with American entrepreneurs, and while they have quite a few similarities, there are also some crucial differences that set them apart.
In this article, we’ll discuss the main commonalities and major differences between these two business types, in an effort to help you decide whether an LLC or a corporation is the right choice for you. By the time you’re finished reading, we think you’ll have a good idea of which business structure you should form.
Common Characteristics of LLCs and Corporations
To begin, let’s first go over several important characteristics that LLCs and corporations share. There is quite a bit of overlap between these business structures, so no matter which one you choose, you can enjoy some of these features.
Personal Asset Protection
First and foremost, these two business types both provide personal asset protection, or in other words, they limit your liability as a business owner. This means that if your company is sued, your creditors can only pursue your business assets, while your personal assets ― including your house, car, personal bank accounts, etc. ― are protected. With sole proprietorships and general partnerships, creditors can pursue whatever assets they want, whether they have anything to do with your business or not.
Business Name Uniqueness
With either an LLC or a corporation, the government will ensure that your business name is uniquely yours. Other companies will be prevented from using your same business name, or even any name that is deemed to be too similar to yours. This is a great way to protect your company’s reputation, and to prevent anyone else from trying to profit off of your hard work.
Major Differences Between LLCs and Corporations
Of course, these two business structures also have many differences that set them apart, and from analyzing these differences, you’ll likely be able to figure out which one is the best fit for your company. While this isn’t an all-encompassing list, these are the most important differentiators between the LLC and the corporation.
From the startup phase itself, it becomes clear that there are some huge differences between corporations and LLCs. The LLC formation process is rather simple and straightforward, and it usually doesn’t cost much either. By contrast, the corporation takes much more time and effort to form, and the fees associated with doing so are typically considerably more expensive.
Let’s take a quick look at the formation processes for each of these business structures to illustrate just how much they differ in this area.
Limited Liability Company: To form an LLC, the main step is to create documents called the articles of organization, which you then file with your state of formation. While each state has its own requirements for these forms, in general you 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. Once you’ve completed your articles, all you need to do is file them with your state government.
Corporation: There are several steps involved with corporation formations. In short, these are the typical requirements of this process.
- Articles of Incorporation: These documents are quite similar to the LLC’s 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: These documents explain how your business will operate. This information is usually a bit more specific than the articles of incorporation, including info on holding meetings with your shareholders and directors, the procedure for amending your articles of incorporation, and the standard practices for recordkeeping.
- 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 the ownership of your company.
There are also some major differences in the way these two business structures are treated as legal entities.
- Limited Liability Company: The LLC as a structure hasn’t been around for very long, as it took until 1996 for all 50 states to adopt the limited liability company as a business type. Because it’s still a relatively new business entity, there’s not a whole lot of legal precedent for the way LLCs are treated by the courts. Not only is there still some room for interpretation involved, but because each state governs LLCs differently, there are different rules and regulations for forming and maintaining them depending on which state you’re in.
- Corporation: Corporations as a business structure are hundreds of years old, so as a result the legalities have been established for a long time. Also, there isn’t state-to-state variance like there is with LLCs, as the same laws apply nationwide.
Ownership and Management
The other area that has significant differences between LLCs and corporations is in the realm of who owns the company, and how it’s managed.
- Limited Liability Company: The ownership of an LLC is rather simple, as limited liability companies’ members own the company, and they can split profits however they want to. As for management, LLCs can be managed by their member/owners, or they can choose to hire a manager from outside the ownership group.
- Corporation: A corporation’s ownership group consists of its shareholders, as without stock certificates, there is no claim to ownership. The management structure is very different from that of an LLC, as there is a strict corporate structure to adhere to. The company’s board of directors takes care of major managerial issues, and the corporate officers take care of the day-to-day minutiae.
How Are LLCs and Corporations Taxed?
This is where the distinction between C corporations and S corporations comes into play. Drawing comparisons between these two types of corporations and LLCs is difficult because LLCs can choose how they want to be taxed. 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. This means that the profits and losses aren’t claimed on a business tax return, but rather are passed through the LLC to its owner/members, who then claim the profits or losses on their personal returns. However, an LLC can also elect to be taxed like a C corp or S corp…
- C Corporation: Most corporations are C corps, because they’re not subject to nearly as many regulations as S corps are. The C corp is subject to what’s known as double taxation, in which 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.
As you can see, there are many significant differences between the limited liability company and the corporation. Generally speaking, corporations are the better choice for large companies, while the LLC fits best with small-to-midsize businesses, although there are certainly exceptions to these generalizations as well.
In our opinion, many of the differences between these business structures come from the fact that the LLC is a more recent development, and it also has different rules and regulations depending on which state you’re forming and operating one in. On the other hand, the corporation is a steady, long-standing business form with plenty of history and precedent.
Regardless of which one you choose to form for your business, we wish you the very best of luck!