Corporation vs LLC
Comparing the Corporation to the LLC
Limited Liability Company)
Incorporating a business and forming an LLC (Limited Liability Company) offer many advantages to a small business owner.
The Corporation and the LLC have:
Limited Personal Liability
Both structures limit liability to the amount shareholders or members
invest in the company. Therefore personal assets, including homes, cars,
savings and investments, are protected from the liabilities and risks of
the business.
Ability to Raise Capital
Both structures allow a business to borrow money and sell equity to raise capital.
Unlimited Duration
Both structures continue indefinitely, unless they are dissolved.
Differences between the Corporation and the LLC
LLC - Fewer Corporate Formalities
An LLC generally requires less corporate formalities than a corporation. An LLC
may be managed directly by members; there is no need to have a separate board of
directors or annual shareholder meetings and periodic directors meetings with
minutes. For many, the convenience and simplicity of forming a single-member LLC
that is managed by the member provides the limited liability protection without
adding a lot of corporate bureaucracy.
LLC - Pass-through tax treatment
LLC's provide pass through tax treatment and avoid an entity level tax. This
means that an LLC is not a separately taxable entity and business income or losses
are reported on the individual tax returns of the owners. This is similar to an
S-Corporation, but different from a C-Corporation, which is a separate taxable
entity. For those LLC owners who wish to be taxed as a corporation, however,
they may elect such tax treatment by making a filing with the IRS.
LLC - Flexible Profit Allocation
Another advantage of an LLC over a corporation is the ability to allocate
profits and losses among the members as the members agree, while in corporations
dividends can only be paid pro rata according to share ownership. The IRS allows
for special allocations for LLCs and we recommend consulting your accountant or
tax advisor to learn more about this option.
State Filings
LLC's do still require State Filings, though they are different from those
for Corporations. Articles of Organization must be filed with the Secretary of
State to form an LLC and the members of the LLC are required to enter into an
Operating Agreement that governs how the LLC will be operated.
Number of Owners
Another difference between a corporation vs an LLC is that while both can
have multiple owners, there are differences in how many. LLCs and C-Corporations
can have an unlimited number, while S-Corporations are limited to 100 Shareholders.
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