LLC vs. Corporation: Which Is Right for Your Business?
You already know that huge businesses can be LLCs or corporations. But which is right for your business? Discover the similarities and differences between an LLC and a corporation. Learn how each entity varies according to ownership, management, and formal requirements.
What is an LLC?
A limited liability company is a legal entity or business structure that protects business owners from personal liability, such as debts. Many consider them hybrid because of the mixed characteristics of a sole proprietorship or partnership and corporation. Their regulation varies according to state, but anyone can be an LLC member with very few exceptions.
What is a Corporation?
A corporation is a business structure that separates the business from its owners. They own similar rights and responsibilities as an individual, being part of loans, contracts, and owning assets. Corporations can also sue and be sued, but they must pay taxes.
LLC vs. Corporation: Ownership
In terms of company ownership, corporation owners are called shareholders. They usually sell shares of the business, and each one can own any amount of shares. This number also refers to a specific percentage of possession. For example, if the corporation issues 500 shares and you own 200, you own 40% of the company.
Meanwhile, the owners of an LLC are called members. Every member also has a percentage of the company. Instead of shares, the correct term is membership interest.
LLC vs. Corporation: Management and Recordkeeping
When it comes to management, corporations are more complex and rigid. They always have a board of directors that observes and manage the general picture of the business, its problems, and its officers.
LLCs are managed by their members instead of a board of directors. The business acts like a partnership, sometimes not even having formal ranks and positions. It can be handled by a manager if there are several members.
LLC vs. Corporation: Taxes
Corporations are divided into different types based on tax requirements. C-corporations settle their income tax on profits. Owners have to settle them as dividends, also known as double taxation. Meanwhile, S-corporation profits encounter personal tax returns for shareholders. Then, they are taxed depending on their profit.
Some LLCs can be taxed as S-corporations. But some don’t. The requirement includes 100 or fewer owners of shares.
Some LLCs can be taxed as a partnership or sole proprietorship, which works best if you have a small business. But this is not an excellent idea for huge companies because it can be expensive for them.
LLC vs. Corporation: Formal Requirements
LLC and corporation must meet requirements to be registered as a business and continue operating. For example, LLCs keep fewer records. They do not need to keep minutes, hold meetings occasionally, or elect a board of directors.
Corporations are subject to more formal requirements. They need annual meetings for shareholders, which are documented and recorded through corporate minutes. They must also file yearly reports and decide on different projects as a board.
