Incorporating Vs. LLC

by Shelly Morgan
LLCs and corporations are governed by a combination of state and federal laws.

LLCs and corporations are governed by a combination of state and federal laws.

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One of the most important initial decisions in starting a business involves deciding what type of business entity your new venture should be. Two options are corporations and limited liability companies, or LLCs. There are distinct advantages and disadvantages to each type with respect to personal control, taxation and personal liability.

Similarities

Although an LLC is not a corporation, it has many of the same benefits. The law views both LLCs and corporations as independent entities. Both can sue, be sued, buy, sell, lease and mortgage property, just like an individual person. An LLC shields its owners from liability in much the same manner as a corporation.

Differences

LLCs observe fewer legal formalities than corporations. The board of directors and shareholders of a corporation must hold regular meetings and keep minutes of those meetings. The managers and owners of an LLC -- who are called members -- do not have to hold regular meeting and keep written minutes. LLCs are also treated differently from corporations with respect to taxation. Whereas a corporation must pay taxes on its profits, how an LLC is taxed depends upon how it was set up. By default, the profits of an LLC belong solely to the members -- who are taxed as if they were sole proprietors or partners. Alternatively, the LLC can elect to be taxed as if it were a corporation.

Formation

LLCs and corporations are formed by paying a fee and filing documents with the secretary of state or a similar state office, depending on the state in which it is formed. While there are slight variations among the states, the basic pattern to form these entities is very similar. For example, California law requires that the organizer of an LLC file the articles of organization, which identify the registered agent and the managers of the LLC. The registered agent is a person who receives the summons and complaint if the entity is sued. To form a corporation, the incorporator must file the articles of incorporation. This document identifies the corporate purpose, the registered agent and the number of shares the corporation is issuing.

Governance Differences

Unlike an LLC, a corporation must have bylaws. These bylaws are the primary governing document of the corporation. They usually indicate the number of directors, how the directors are elected, what type of notice is required for meetings, and what type of corporate officers should be appointed. An LLC has no bylaws. It is run by one or more managers who may be members of the LLC. An LLC typically has an operating agreement, which is a document that outlines the internal operations of the business. Once the members sign the operating agreement, it acts as a contract binding them to its terms. However, while an operating agreement is often key to the successful operation of an LLC, most states do not require LLCs to have them.