An LLC and a corporation are two types of legal entities that can be chosen to structure a business. Both LLCs and corporations are created under state law, with each state’s requirements varying to some degree. Because the primary purpose of enacting LLC laws was to create a legal entity that combines the advantages of incorporating a business with the advantages of operating a business as a partnership, LLCs and corporations share similar traits, as well as differences. A comparison of these similarities and differences can help a business owner choose one structure over the other.
Fit your business needs with the right LLC package
Like a corporation's shareholders, the owners of an LLC -- called members -- enjoy a shield against personal liability; that is, the business owner's personal assets are protected from the debts and obligations of the business. So long as the LLC members do not personally guarantee the debts of the LLC or commingle the LLC property with personal property, a member’s liability protection should be co-extensive with that of a corporate shareholder.
Continuity of Existence
Once created in accordance with state law, a corporation's existence is perpetual unless voluntarily dissolved by the shareholders or involuntarily dissolved by the state or court. Although many states permit an LLC's members to form the LLC with the intention that its existence is perpetual, an LLC can be formed with a specified limited duration, such as 25 years. Also, unlike a corporation, state laws often provide that an LLC will dissolve upon the occurrence of certain specified events, such as the death, resignation or bankruptcy of a member.
A corporation's management structure is centralized primary authority for corporate action vested in a board of directors elected by the shareholders. The board in turn appoints executive officers, such as president, treasurer and secretary, who are responsible for the corporation's day-to-day operations. The actions and decisions of the shareholders, directors and officers are taken after properly called meetings and memorialized in written resolutions and minutes of meetings. In contrast to this highly centralized and formal management structure, LLC laws permit the members to all share equal authority for the LLC's management without the need for meetings or adherence to formalities such as resolutions and minutes of meetings.
One of the notable differences between LLCs and corporations is in the area of federal income taxation. The Internal Revenue Code does not recognize an LLC as a legal entity for federal tax purposes and permits the members of an LLC to choose their federal tax status, either corporate or partnership. Because corporate profits are taxed first as corporate income and then taxed again as shareholder dividends, corporations have a double taxation problem. LLCs can avoid this problem by electing to be taxed as a partnership which, under IRS rules, is not subject to income tax; that is, the profits and losses of the partnership are passed through to the individual partner and therefore only taxed once.
LLCs are a much newer type of legal entity than corporations, with most states enacting their first LLC laws in the mid-1990s. Corporate law has a much longer history dating back to the formation of each state's legal system. As a consequence of the LLC's relative newness, a state’s case law interpreting LLC statutes are not as well developed as that of corporate statutes. It is uncertain how courts may apply concepts affecting a corporation's actions to an LLC's action. Whether the members will receive the benefits they expect from LLC statutes may not be fully known until there is sufficient case law interpreting LLC statutes (see Resources).
References & Resources
- Buinsess.gov: Limited Liability Company (LLC)
- The Standard Legal Law Library: LLC vs. Incorporation
- Delaware: Division of Corporations Legal Business Structures Table
- FindLaw: Pros and Cons: Business Form and Taxation
- Oklahoma Department of Commerce: Business Structure Matrix
- IRS: Limited Liability Company (LLC)
- Limited Liability Companies: Could your personal assets be at risk?
- Stoel Rives LLP: LLC Monitor - Piercing the Veil vs. Direct Member Liability in Connecticut