At one time, there were only three options for company organizers choosing a form of business organization: the sole proprietorship, the partnership and the corporation. Then in the 1970s, the limited liability company (LLC) was introduced in some states. As of 2010, LLCs are authorized by all 50 states and the District of Columbia. It is similar to the corporation in some ways and different in others.
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Both corporations and LLCs are created under state law and initial formation is simple and straightforward. Both enjoy limited liability; owners are held liable for company debts only to the extent of their capital contributions, leaving personal assets safe from creditors. State law restricts aspects of the structure and operations of both.
Corporations must appoint a board of directors, compile minutes of board and shareholder meetings and issue stock. LLCs are not required to take any of these actions. Furthermore, state law is more flexible regarding the structure and operation of LLCs than it is for corporations. There are fewer restrictions on who can be a shareholder and fewer regulations on how an LLC is structured and managed. For example, it is acceptable for an LLC members to assign the economic benefit of his ownership interest in the LLC to a non-member while retaining voting rights. The net impact of this flexibility is that LLCs can operate more informally and with less expense than corporations.
Corporations can receive two different types of tax treatment: C corporation treatment or S corporation treatment. If the corporation is taxed as a C corporation, its income is taxed at corporate income tax rates. When the corporation distributes dividends to its shareholders, these dividends are taxed again as individual income. If the corporation qualifies as an S corporation and elects to be treated accordingly by the IRS, its is not taxed except on passive income and profits are allocated to shareholders. LLCs can receive four different types of tax treatment: A one-member LLC can be disregarded and its income attributed to the member. A multi-member LLC can be treated as a partnership. An LLC can also opt to be treated as a C corporation and, if it qualifies, an S corporation.
Because LLCs are a relatively new form of business organization, it is often more difficult for an LLC to raise cash than for corporations. Lenders may be more likely to require LLC members to personally guarantee the LLC's debts. Moreover, since LLCs cannot issue shares to the public, if you are starting a company that you hope will "go public" at some point in the future, the LLC is not the best option.