LLC vs Corporation

It is important to consider whether forming an LLC or incorporating your new business is the most suitable option for you. While LLCs and corporations have some similarities, there are significant differences that can impact your taxes, protections, ownership, management, and other important aspects of your business. In the following information, we will compare the similarities and differences between LLCs and corporations.

A Limited Liability Company (LLC) and a corporation are two common business structures that offer different benefits and drawbacks.

An LLC is a business structure that combines the liability protection of a corporation with the tax benefits of a partnership. LLCs offer flexible management options, as the owners (also known as members) can choose to manage the company themselves or appoint managers. LLCs are also relatively easy to set up and maintain, as they have fewer formalities and paperwork requirements compared to corporations.

A corporation, on the other hand, is a separate legal entity from its owners (also known as shareholders). This means that the corporation, rather than the individual owners, is responsible for its debts and legal issues. Corporations offer limited liability protection to their shareholders, meaning that the personal assets of the shareholders are generally not at risk if the company faces financial or legal issues. Corporations also have the ability to issue stock and raise capital through the sale of stock. However, corporations have more formalities and paperwork requirements, and may be subject to more taxes than LLCs.

Ultimately, the choice between an LLC and a corporation will depend on the specific needs and goals of the business. It is a good idea to consult with a business attorney or tax professional to determine the best structure for your business.

LLC and Corporation Similarities

Here are some similarities between LLCs and corporations:

• Formation: Both LLCs and corporations are required to file articles of incorporation or articles of organization with the state in which they are formed and obtain a federal Employer Identification Number (EIN).
• Separate Legal Entities: Both LLCs and corporations are separate legal entities from their owners, which means they can enter into contracts, own assets, and incur liabilities in their own names. T
• Limited Liability: Both LLCs and corporations offer liability protection to their owners, also known as “members” in the case of LLCs and “shareholders” in the case of corporations. This means that the personal assets of the owners are generally not at risk if the business incurs debt or is sued.
• Registered agent requirements: Both LLCs and corporations are required to maintain a registered agent in each state where they do business. The registered agent is the person or entity assigned to receive legal notifications on behalf of the business.
• Unlimited Number Of Owners: Both LLCs and corporations can have an unlimited number of owners (also known as “members” in the case of LLCs and “shareholders” in the case of corporations).
• Corporate Formalities: Both LLCs and corporations are required to maintain corporate records and hold annual meetings.
• State compliance: LLCs and corporations must maintain state compliance, typically by filing annual reports. These reports confirm or update basic business and contact information, and most come with a filing fee. While some states have different fees or requirements for LLCs and corporations (for instance, New Mexico and Arizona don’t require reports from LLCs), most states require regular reporting from both entity types.

Differences Between LLCs and Corporations

To decide between forming an LLC or incorporating, it’s important to understand the differences between LLCs and corporations.

Tax election options

LLCs have more tax election options than corporations. By default, corporations are taxed as C-corps, but they may be eligible to file paperwork with the Internal Revenue Service (IRS) to be taxed as an S-corp. Single-member LLCs are taxed as sole proprietorships and multi-member LLCs are taxed as partnerships by default, but LLCs may also elect to be taxed as C-corps or S-corps.

The following are the tax designations available to LLCs and corporations:

• Partnership or sole proprietorship: These tax designations are subject to pass-through taxation, meaning that the business itself does not pay entity-level taxes. Instead, the income is passed through to the owners, who report it on their personal tax returns and are subject to self-employment taxes.
• C-corp: A C-corporation files corporate income taxes, and shareholders must also report any income they receive on their personal tax returns. This results in “double taxation,” as the income is taxed at both the entity level and the personal level.
• S-corp: S-corps, or “small business corporations,” are subject to various restrictions, including a limit of 100 shareholders and one class of stock. Shareholders must be US citizens or permanent residents and cannot be corporations, LLCs, or most other businesses. Shareholders may receive dividends, but shareholders who provide services must first be paid a reasonable salary, which is subject to self-employment taxes. S-corps are subject to pass-through taxation and do not file corporate income tax.

It is important to note that LLCs have the option to be taxed as any of the above designations, while corporations are limited to C-corp or S-corp taxation. For a summary of the effects of these tax elections, please refer to our Free LLC Guide.

Business ownership

LLC owners, also known as members, hold a percentage of the company known as “membership interest.” This interest is generally not easily transferable and may require the approval of other members before it can be transferred, if it is transferable at all. This is typically outlined in the operating agreement or state statutes.

On the other hand, the owners of a corporation, called shareholders, own shares of corporate stock, which are easily transferable. This can be more attractive to potential investors.

It is important to note that shares of corporate stock of a statuary closely corporation such as a “Wyoming Close Corporation” are not easily transferable and may require the approval of other shareholders before it can be transferred, if it is transferable at all.

Company management structure

In a corporation, shareholders elect a board of directors to govern the business and make strategic decisions. The board then elects corporate officers, such as the president, treasurer, and secretary, to manage the day-to-day operations of the corporation and carry out the decisions of the board.

LLCs offer a more flexible approach to management. In a member-managed LLC, the members themselves are responsible for running the day-to-day operations. In a manager-managed LLC, the members appoint or hire one or more managers to handle these responsibilities. In this case, the members function more like shareholders, able to vote out managers but not make business decisions.

Charging order protections

In many states, LLCs offer stronger charging order protections than corporations. If a shareholder of a corporation is personally sued, creditors in nearly all states can be awarded the shareholder’s ownership interest in the corporation, potentially allowing them to take control of the business. However, if an owner of a multi-member LLC is personally sued, creditors are typically limited to a charging order. This is a lien against distributions, meaning that creditors can collect any profits the owner would have received from the business, but they do not gain ownership interest or control of the LLC. It is important to note that the strength of these protections varies by state. For example, California and Minnesota offer fewer protections, while Wyoming extends protections to single-member LLCs as well.

Corporate formalities

Corporations are typically subject to stricter requirements for meetings and record-keeping compared to LLCs. For example, state statutes often require corporations to hold annual meetings and keep formal minutes, which must be recorded in a corporate book. While it is good practice for LLCs to follow these requirements as well, they are not typically required by state statutes.

It is important to note that a Wyoming Close Corporation or a Wyoming Close LLC may offer a lot of benefit to small business. One of the key features of Wyoming close corporations is that they are not required to follow the same corporate formalities as other corporations, such as holding annual meetings and keeping formal minutes. This can make them easier to manage and operate compared to traditional corporations.

It is also worth noting that there are other, less tangible differences between LLCs and corporations. The inclusion of “Inc.” or “Corp.” at the end of a business’s name can convey a sense of prestige and authority that “LLC” may not. Additionally, corporations have a longer history, which has resulted in a greater amount of legal precedent, making it easier to anticipate how legal changes and cases may play out in court.