The limited liability company (LLC) and corporation both establish the company as its own entity with a legal existence separate from that of its owners, who are called "members" in an LLC and "shareholders" in a corporation. Both business forms provide limited liability from suit for the torts of company employees or other members or shareholders. Despite their many similarities, however, there exist several important differences.
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LLCs and corporations differ in terms of the documentation necessary to start and operate each type of company. With an LLC, the organizers prepare articles of organization, sometimes referred to as a certificate of organization or certificate of formation, and an operating agreement, although this agreement is not required by law in most states. The organizers of corporations must prepare articles of incorporation, sometimes referred to as a corporate charter, and bylaws. The articles of incorporation will contain an initial issuance of stock with one or more classes. The bylaws of a corporation may or may not be filed with the state, depending upon the jurisdiction, whereas the operating agreement of an LLC is generally not filed with the state. While both shareholders in a corporation and members of an LLC must file annual reports with the state, corporations must hold annual shareholders's meetings, the minutes of which the corporate secretary must keep in written form.
Although some of the documentation requirements applicable to corporations and LLCs may be parallel to some extent, the two forms diverge considerably in terms of filing fees and operating costs associated with each one. Corporations generally pay lower fees to file articles of incorporation and bylaws than LLCs pay to file their articles of organization, and each pay different fees to file their annual reports. In North Carolina, for example, both LLCs and corporations pay $125 to file their articles of organization and articles of incorporation, but an LLC pays $200 to file its annual report and a corporation pays only $25.
One of the most marked areas of divergence between corporations and LLCs concerns taxation. Members of an LLC receive the benefit of "pass-through" taxation, where company profits are reported on their individual tax returns. Profits of a traditional corporation, on the other hand, are subject to double taxation. The corporation pays taxes on its profits and the shareholders then pay income taxes on the dividends they receive from the corporation or capital gains tax when they sell appreciated stock. Corporations can receive pass-through taxation by filing under subchapter S of the Internal Revenue Code, but not all corporations will qualify for subchapter S status.
LLCs and corporations differ also in terms of their transferability. In some states, LLCs terminate when the member dies or goes bankrupt, whereas shares in a corporation can become property of a bankruptcy estate or be inherited. Corporate shareholders can also generally transfer the voting rights that come along with their stock, whereas one who assigns an interest in an LLC can usually only transfer the economic rights incident to that interest and not the right to participate in the management of the company.
References & Resources
- AllBusiness: What Are Corporate Bylaws and Why Are They Important?
- North Carolina Secretary of State: 2010 Corporations Division Fee Schedule: Domestic and Foreign Business Corporations.
- North Carolina Secretary of State: 2010 Corporations Division Fee Schedule: Domestic and Foreign LLCs.
- United States Internal Revenue Service: S Corporations.
- Wagner, Johnston and Rosenthal, P.C.: Selling an LLC Unit Is Not The Same As Selling Stock.
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