LLC vs. Corporation
Making sure that you file the proper entity structure for your business is very important. Whether it is to form an LLC or a corporation, the experts at DoMyLLC are here to help by providing up-to-date information in order to assist you in forming the proper entity for the business. Let’s take a look at some key differences between both structures.
Owners of an LLC are called members while the owners of a corporation are shareholders. Ownership in an LLC is broken into percentages between its members while a corporation is divided into shares of stock. Here is a simple breakdown of what ownership looks like for both structures. If a corporation is authorized to sell 1000 shares of stock and three partners each buy 100 shares, then each owns 33% of the company. The company will have 700 shares of stock left over that can be sold if the business so chooses. An example of ownership between members within a LLC would be, one member gives $60,000 and the other gives $40,000. The person that gave $60,000 owns 60% and the person that gave $40,000 owns 40%.
In order to understand the differences between the two entity types, it is important to understand the structure they both have.
|Shareholders – Owners|
|Directors – Appointed by Shareholders|
|Officers – Appointed by Directors|
|Limited Liability Company (LLC)|
|Members – Owners|
|Managers – Appointed by members to run the business|
In a corporation the business is owned by the shareholders, overseen and managed by the directors and the day to day operation is conducted by the officers. In smaller corporations, it is not uncommon for an individual to be a shareholder, director and officer. Shareholders of a corporation own the business based on the amount of stock they have purchased. When you form an LLC, the company can be managed by the members or the members can appoint a manager(s) to run the day to day activities of the business. Members own the business based on their capital contribution to the business.
A corporation structure is much more formal than an LLC. LLCs have very little maintenance requirements which is why they have become so attractive to entrepreneurs. Corporations are required to have a board of directors appointed by the shareholders to manage the business. The board of directors and shareholders are required to hold annual meetings and take minutes of those meetings. The meeting minutes are required to be stored with the internal corporate records. Corporations are also required to have bylaws, which are the rules and regulations of how the company will be governed. Although this might seem a little overwhelming, it is not as complex as it sounds.
When you form an LLC, the members/owners can choose to manage the business or appoint a manager(s) to manage the company. The LLC is not required to hold meetings or take minutes of meetings. The governing document on how the company will be run is called an, “Operating Agreement.” Although not all states require an LLC to have an operating agreement, it is advisable to have one, especially if there are multiple members of the LLC. Make sure to check with your state to find out if an operating agreement will be required.
The taxation afforded to an LLC is much more flexible than a corporation. C-corporation’s file a corporate tax return. The corporations’ corporate return and taxes are based on its net income. Then any of the net profits (dividends) distributed to shareholder gets taxed again. This is referred to as double taxation and is the main disadvantage of a C-corporation. A corporation that wants to avoid the potential double taxation of a C-corporation can elected to taxed as an S-corporation if all the requirements are met. With an S-corporation the profits of the business pass through the company to the shareholder(s) to report on their individual tax returns.
S-corporation requirements are:
- The business can have no more than 100 shareholders
- Shareholders must be individuals, estates, certain trusts and certain exempt organizations
- Shareholders must be US citizens or residents
- All shareholders must consent to the election
- The business can only have one class of stock
- Profits and losses must be allocated according to each owners interest in the business
With a corporation there is not much flexibility in taxation unlike the LLC business structure. An LLC can choose how it wants to be taxed regardless of its organization and structure. An LLC’s default tax structure is a “pass through” structure, however it can elect to be taxed like an S-Corp or a C-Corp if it qualifies. In certain circumstances electing C-Corp taxation may be beneficial, however, most businesses will not see a benefit in doing so. Another benefit to an LLC is that the profits and loses can be allocated as the business sees fit regardless of an owners interest in the business. With a corporation this is not possible unless a special classification of stock is created.
Brief History of Entity Structures
One of the most important things to remember about LLCs and corporations is that they both are separate legal entities from their owners and they both offer personal liability protection for owners. Beyond that, what structure a company decides really becomes a tax and management question that only that business can answer.
The corporation structure has been around since the late 1700’s. There are over 200 years of corporate law precedent that courts have to fall back on. There is almost no situation that courts cannot reference to resolve a matter pertaining to a corporate law case. Because of this, states tend to have the same treatment across the board when it comes to corporate law. This is not the case with an LLC. The LLC structure was first recognized in the 1970s and was designed to be a hybrid between a corporation and partnership. Since the structure has only been around for 40-50 years there is not as much law precedent courts can fall back on. Because of this, treatment of an LLC may differ from one state to another.
At DoMyLLC we are here to help you file the right business structure. We will provide you all the information to help you make an informed decision when filing your business. If you are not 100 percent sure on what structure to go with, it’s best to speak with a professional. We can answer the question of “how to form an LLC”.
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