Difference Between an LLC & Incorporation

By Stephanie Kurose, J.D.

Difference Between an LLC & Incorporation

By Stephanie Kurose, J.D.

A limited liability company (LLC) and a corporation are two types of common business structures. Incorporation is the term for the process of forming a corporation. Both corporations and LLCs provide limited liability for their owners, meaning the business is a separate legal entity and the owners are not personally liable for its debts and other financial responsibilities.

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An LLC is unique, however, in that it combines features from a corporation as well as a partnership—another type of business structure. Thus, while LLCs and corporations are similar in many ways, they also differ significantly in some respects. The main differences include how they are organized, what formal requirements they must follow, and how they are taxed.

Organizational Structure

The basic structure of a corporation includes three parts: the board of directors, the officers, and the shareholders. The board of directors controls the corporation and is responsible for writing the bylaws, holding annual meetings, ensuring the corporation follows the law, and keeping the corporation on track, among other things. The board reports to the shareholders, who own the corporation but typically do not take part in daily operations. Corporate officers, or upper management, oversee the business operations and handle day-to-day tasks. The board of directors usually elects the corporate officers.

In contrast, an LLC requires no such structure and is owned by members listed in its articles of organization, which it files with the state at its inception. This kind of company can add or remove members. Company profits can be distributed as members see fit and do not have to but can be based on the percentage of ownership.

An LLC can choose to have managers, who are somewhat similar to corporate officers in that they are in charge of running the daily operations of the business, but it is not a requirement for them to do so. If the members choose to run the daily operations themselves and not elect managers, then the business is member-managed.

Formal Requirements and Taxation

When a business structures itself as a corporation, the state requires certain formalities. For example, in many states, a corporation's board of directors must hold a meeting at least once a year and maintain minutes for each meeting. State law also generally requires at least one shareholder meeting a year. None of these rules apply to LLCs, who are not required to hold member meetings.

Unlike corporations, LLCs have some flexibility when it comes to how they elect to be taxed by the Internal Revenue Service (IRS). Corporations have no choice; they are subject to corporate taxes and failure to pay those taxes results in major legal issues. An LLC, however, can elect to be taxed as a partnership or as a corporation for federal tax purposes. If taxed as a partnership, the business itself does not pay federal income taxes. Instead, the company passes its profits to the individual members, who then pay taxes on the profits they received on their personal returns.

Due to the nature of "pass-through" taxation, the tax returns for LLC members include self-employment tax on their business income. A corporate shareholder, board member, or corporate officer does not have to pay self-employment tax.

When deciding on what kind of business you'd like to form, there are a lot of aspects to consider. The structure, legal requirements, and taxation are different for both types, so understanding each one is important. While researching , be sure to also check the requirements of your state so that you'll always be in legal compliance.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.