As an entrepreneur, one of the important decisions you must make is what type of legal entity to create for your business. Two common structures that offer owners protection from personal liability in business dealings are the LLC and corporation. Each state and the District of Columbia have its own requirements to form an LLC or to incorporate. However, most jurisdictions have similar requirements for both types of entities.
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The creation of a corporation generally requires you to file articles of incorporation in the relevant jurisdiction. The articles require the name of the business, its address, the type of operations you will conduct, and the name and address of the registered agent and incorporators. Only corporate structures may include the term “Inc.” after the business name, which indicates to the public that the business is a corporation. Similarly, LLCs must file a certificate of organization that includes the name of the business, the principal office address and the name and address of an agent who may receive legal service of process on behalf of the LLC. LLCs generally must include some wording in the name to indicate the structure, such as "LLC" or "Limited Liability Company." Legal formation of both types of entities occurs on the date the appropriate state office files the required documentation.
The owners of a corporation hold stock certificates or shares in the company. Generally, shareholders of the corporation have the right to vote in board of director elections, on resolutions to dissolve the company and on other matters that require fundamental changes to the corporation. In contrast, the owners of an LLC do not receive a share of stock in the company. In the absence of an operating agreement, most jurisdictions allow the member to actively engage in daily business operations, not just on fundamental business matters.
Most states allow the corporation and LLC to place restrictions on the transferability of shares and membership interests. However, in the absence of a restriction, states preclude an LLC member from transferring any interest in an LLC that includes the right to manage the business. However, the LLC member may sell the financial interest with the transferee’s only rights being the claim the transferring member has on firm assets and earnings. Conversely, jurisdictions generally view a stock certificate as a negotiable instrument and allow a shareholder to transfer all voting and equity rights in the company to another person.
Corporations must adhere to all federal corporate tax requirements. These include the filing of an annual IRS Form 1120 and the prompt payment of income tax on all business earnings. This is the sole responsibility of the corporation as shareholders are not liable for a corporation’s failure to comply. The IRS designates all multi-member LLCs as partnerships, and single-member LLCs as sole proprietors solely for tax purposes. However, if members agree, the LLC may elect corporate tax treatment by timely filing IRS Form 8832. If the LLC makes an election, it is binding on the LLC and its members for 60 months before a new election can be made.