What Is the Difference Between an LLC and a Corporation?

When starting a new business, choosing an entity type is one of the most important decisions you must make. Many entrepreneurs are torn between a limited liability company (LLC) vs corporation. While these entities are similar in many ways, they have profound differences that should inform what you choose.

What Is a Limited Liability Company?

A limited liability company (LLC) is a type of business entity that protects its owners from personal liability. It is a hybrid business structure that blends the features of a partnership and corporation.

The owners enjoy limited liability just like corporation owners and receive taxable dividends just like in a partnership. Some of the most notable limited liability companies include Johnson & Johnson, Nike, and PepsiCo inc.

No restriction in the number of owners and owners enjoy limited liability
Pass-through taxation and flexibility in taxation
Easy to operate plus flexible management options

Compared to other forms of business ownership such as a partnership or sole proprietorship, it’s costlier to form and maintain an LLC
Obtaining ownership interest might not be easy

What Is a Corporation?

A corporation is a business entity formed by one or more people with a shared goal. The most common types of corporations include S corporations, B corporations, C corporations, non-profit corporations, and closed corporations.

Generally, corporations are legal entities distinct and separate from their owners. The entity can borrow money, enter contracts, hire employees, pay taxes, and even own assets with zero attachment to the stakeholders. The majority of large businesses, such as Toyota Motors and CocaCola Co., are corporations.

Stakeholders are not liable for corporate debts and legal obligations
Buying, selling, or transfer of ownership is straightforward
Easier access to capital through stock trading
Established power structure–Shareholders, chief executive officers, and directors have well-established responsibilities
S corporations are not subject to double taxation

Complex application process
Excessive bureaucracy, and rigid formalities
C-corps are subject to double taxation
It can be costly to form, run, and maintain a corporation

LLC vs. Corporation: The Differences

LLCs and corporations are alike in many ways. At the same time, they have major differences, especially in terms of formation, governance, ownership, and taxation. This comparison chart summarizes the key differences which we will discuss in detail.

Limited liability

Yes

Flexible Management Style

Yes

Eligibility Restrictions

Yes

Limitless Shareholders

Yes

Capital Structure Restrictions

Yes

Single Taxation

Yes

Double taxation

Yes

Entity can go Public

Yes

Annual Reports

Not Required

Yes

Annual Shareholder Meeting

Not Required

Yes

Can Raise Funds From Investors

Yes

Directors are Public Record

Yes

Formation

There are strict formal requirements that must be fulfilled when forming both LLCs and corporations. Both entities must fulfill state maintenance and reporting requirements to ensure limited liability protection. However, corporations have more annual obligations. For example, they must hold annual shareholder meetings.

Moreover, corporations must file annual reports to keep the secretary of state updated about any changes or actions enacted through votes by the board of directors. LLCs don’t have strict record-keeping requirements, and some states, such as Ohio, don’t make it mandatory for such entities to file yearly reports with the secretary of state.

Ownership

To own a corporation, you have to buy a share or a percentage of the business stock. Shareholders are entitled to dividends and are not actively required to take part in running the business. Also, they can sell and buy shares as they wish.

On the other hand, LLCs are owned by members who set the rules pertaining to the requirements for membership and transfer of ownership interest. Depending on the set operating agreement, all members could receive equal profits and losses regardless of their financial contribution to the business. Again, all members own the business and participate in its everyday operations.

Transfer of Ownership

With corporations, ownership is wholly based on the shares owned. If a shareholder wants a stake in the company, they simply need to sell or transfer their stock to a willing buyer.

LLCs do not enjoy the same freedom. A member must draft a sales agreement with a new buyer and might have to record the sale with the state’s Business Registrations Agency. While there are no significant restrictions, a transfer process can be laborious and time-consuming.

Governance and Management Structure

All members in an LLC own the business and participate in its everyday operations. There’s no power hierarchy, and members can play specific management roles or appoint others to run the business. Generally, LLCs are member-managed, and the management structure is less formal.

On the other hand, corporations have a rigid governance structure with the board of directors at the top of the power hierarchy. Shareholders are at the bottom of the power chain. While they have a right to vote for the board of directors and officers, they do not make any business decisions unless they are pre-approved.

Tax Implications

LLCs and corporations are poles apart regarding their tax obligations. LLCs are usually taxed as pass-through entities unless the members choose to have them treated as C corporations. Pass-through entities or S corporations allow owners to pay personal income tax once they receive profits without subjecting them to corporate tax.

C corporations are not immune to double taxation. This means that the business pays taxes as an entity, and owners pay personal income tax after receiving income.

LLC vs. Corporation: What Are the Similarities?

Both of these entities provide personal assets protection for owners and require registration through a state-accredited business filing agency. Also, both entities enjoy perpetual existence even if a shareholder or owner passes on or resigns.

Perpetual Existence

LLCs with two or more members and corporate entities are not at threat of extinction if a member or stakeholder can no longer hold their position. As long as the business owners do not file Articles of Dissolution or set a dissolution date in the formation documents, the entity will continue to run indefinitely.

Business Registration

As expected, you must file formation paperwork with a state-accredited filing agency. It is also mandatory to obtain licenses and permits before kickstarting business operations. Read about the steps involved in registering a business here.

Limited Liability Protection

Both LLCs and Corporations provide asset protection for owners. This means that they are not personally liable for liabilities and debts incurred by the business. However, in some cases, limited liability protection may not prevail, for instance, when an owner personally guarantees a debt or commits a crime.

Frequently Asked Questions (FAQs) for LLC vs Corporation

Are you still torn between forming an LLC and Corporation? Here are the answers to some frequently asked questions. Hopefully, they will shed more light on the topic and help you make an informed decision.

Which One Is Right for Me between an LLC, S Corp, and C Corp?

LLCs and corporations have unique sets of pros and cons. Generally speaking, LLCs are the best choice for smaller businesses and entrepreneurs looking for a more straightforward business formation process. They have lighter state and federal regulations, fewer rules to follow, and relatively simple tax processes.

S corporations have substantially more regulations and legal requirements than LLCs. They are an ideal option for most types of businesses that want to enjoy the unique perks of a corporation, like the ability to trade stocks publicly and still avoid double taxation.

If your goal is to form a larger business, it is best to start a C Corporation. This option is subject to double taxation, and there are much more legalities, compliance, and regulations to follow. The primary benefit is that C Corporations are more attractive to investors than S corporations and even LLCs.

Why Do I Need a Registered Agent When Forming an LLC or Corporation?

Legally, you must enlist a registered agent during the business formation process. The agent serves as a link between your company and the state. It will ensure you receive all legal correspondences and government notices on time.

Must I Seek Legal Help When Forming an LLC or Corporation?

No. It is perfectly okay to handle all the paperwork in person and only pay the state filing fees. However, it is easier, faster, and affordable to work with online business formation companies like LegalZoom or ZenBusiness. They will provide the much-needed guidance to reduce the risk of blunders. Companies like Incfile even offer the option to file your LLC for free.

Bottom Line on LLC vs Corporation

So, what should you go for between an LLC and a corporation? The right answer will depend on the financial, operational, and legal implications you are ready to bear. Think of the business entity as the foundation of your venture that will set the rules you must follow. Because an ounce of prevention is worth a pound of cure, it is perfectly rational to consult a business lawyer before making your final choice.