What Is the Difference Between a Limited Liability Company & a Corporation?

By Brian Richards

The main feature corporations and limited liability companies have in common is the protection for the owners of the business against personal liability for the company's debts. It is for this reason that business owners often choose a corporate or an LLC entity over a sole proprietorship or partnership structure. Choosing between a corporation or LLC can be more challenging, however, and potential business owners should know the legal differences between the two.

The main feature corporations and limited liability companies have in common is the protection for the owners of the business against personal liability for the company's debts. It is for this reason that business owners often choose a corporate or an LLC entity over a sole proprietorship or partnership structure. Choosing between a corporation or LLC can be more challenging, however, and potential business owners should know the legal differences between the two.

Formalities

LLCs are much simpler than corporations when it comes to filing requirements. Corporate owners must file an annual report with the secretary of state in the state in which the business is incorporated. LLC owners file a similar but shorter report either every year or every other year, depending on the laws of the state. The exact information required by the form and the specific formalities surrounding the annual or biannual reports also vary based on location. Additionally, corporate owners must schedule meetings and record minutes at least once per year, draft and maintain bylaws, monitor and report stock ownership, and comply with a litany of state-specific laws regarding reporting requirements. LLCs, on the other hand, are never required to hold meetings and have very limited filing requirements, needing only to file articles of organization with the secretary of state at formation.

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Ownership

Corporations are owned by stockholders, who may or may not be executives or employees of the company. Corporations may be either public or private, which describes how the ownership of the company is handled. Ownership in public corporations is traded openly, and these entities tend to have many small owners distributed around the state, country or world. Private corporations tend to be owned by fewer people who each have a larger ownership interest in the corporation. LLCs do not sell stock like corporations do; rather, the ownership is flexible given the needs and desires of the LLC's founders. LLC owners are free to distribute ownership interest to its members in any way, with or without regard to the financial investment any member has made.

Taxation

Corporations are subject to what is called double taxation, meaning the corporation is taxed once at the moment it earns money and then at a second time when that money is distributed to the shareholders. LLCs, on the other hand, function as pass-through tax entities: the LLC does not pay any taxes on its profits, and these funds "flow through" to the owners who report the money on their own personal income tax returns. This structure benefits LLC owners in a few key ways, one of which is allowing the owners to claim business losses on their own tax returns. This can help to offset personal wealth from other sources, saving LLC owners money.

Consistency

While the corporation is a very old business entity, the LLC is relatively new. As a result, although corporate laws and requirements are similar from state to state, LLCs receive slightly different treatment in each jurisdiction. This means that an owner of a large multistate LLC may be quickly overwhelmed by the various different requirements he has in each location. For instance, some states do not require an operating agreement, while others do. Of those that require the agreement, some demand that it be in writing while others permit it to be oral.

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What Is a Disadvantage of the Corporate Form of Business Entity?

References

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