LLC Vs. C Corporation

By Joseph Scrofano

Limited liability companies and C corporations are both business entities. They are legally distinct entities that are treated separately from their owners, known as members and shareholders, respectively. State laws govern both LLCs and C corporations and these laws vary across state lines in detail. However, many of the same principals for LLCs and C corporations exist in all states. They have differences when it comes to management, business formalities, owner liability and tax treatment.

Management

One significant difference between LLCs and C corporations is the manner in which state laws typically allow these entities to be managed. Generally, state laws allow LLC members to choose whether they want to manage the company themselves -- a member-managed LLC -- or hire outside managers who have no equity stake in the company to manage it -- a manager-managed LLC. LLCs provide flexibility in this way. C corporations, on the other hand, do not. State laws usually require that a C corporation adhere to a specific management structure. A C corporation must have a board of directors who have overall responsibility for management. The board of directors appoints officers to manage the corporation’s day to day activities. Shareholders then have voting rights on major issues involving the corporation like mergers, dissolution or amending the bylaws.

Business Formalities

Another major difference between an LLC and a C corporation involve business formalities. Typically, C corporations, under state law, must adhere to rigid corporate formalities. The C corporation must file articles of incorporation with the state, create by-laws, issue stock certificates and keep track with a stock ledger, and draft board resolutions. The C corporation must keep minutes at all shareholder, board and director meetings. On the other hand, LLCs do not have these requirements. Members typically must file articles of organization with the state, which are usually standard form fill in the blank, and pay a filing fee to form an LLC. Most states encourage LLC members to create an operating agreement to set out the members' rights and responsibilities, but do not require it. Finally, state laws do not require LLC members keep formal minutes.

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Owner Liability

The corporate veil protects both C corporation shareholders and LLC members. The corporate veil is a legal term that refers to the separation of owners of a company from the actual company. In most cases, owners cannot be held personally liable for the debts of the business, nor can their personal assets be used to pay a judgment from a lawsuit. However, in a C corporation, if the owners fail to adhere to the required business formalities, a court may pierce the corporate veil and allow a plaintiff to go after shareholder’s personal assets. For LLCs, on the other hand, courts will usually only pierce the corporate veil when members engage in some type of fraudulent behavior.

Tax Treatment

An LLC can elect that the IRS tax it as a sole proprietor or partnership, or as a corporation. Sole proprietors or partners in partnership have the profits and losses from their business “pass through” to their personal tax returns.The IRS taxes corporations twice. The corporation itself pays taxes on profits. Once the corporation distributes any profits to the shareholders, the shareholders themselves get taxed.

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References

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A corporation is a legal entity that gradually developed into its modern form over hundreds of years. It is designed to encourage investment into potentially profitable projects by limiting the economic liability of its investors. In the United States, corporations are formed and governed by the laws of individual states.

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Compared to other business entities, corporations offer many advantages, such as liability protection and ease of transferring ownership shares. Though corporations are very common, a corporation may not be the best structure for every situation, and it does have some disadvantages.

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Prospective business owners who plan to form their business in Texas may consider whether to form a corporation or organize a limited liability company, or LLC, in that state. Laws with regard to business formation vary from state to state. In Texas, corporations and LLCs have specific differences with regard to management, operations, owner liability and taxation.

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