LLC vs. Corporation: Distinguishing Business Structures
- August 10, 2023
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LLC vs. Corporation: Distinguishing Business Structures
Choosing the right structure between an LLC vs. corporation is important to ensure that it meets the business size and other needs. Whatever option you choose, every option has some benefits such as limited liability, tax structure, and management.
Setting up an LLC is an easy process as compared to a corporation. It provides more flexibility and requires less paperwork. Still there are some disadvantages of LLC and advantages of corporations. To understand this complete scenario, check the difference between LLC and corporation.
Ownership Structure
The owners of the LLC are called members and each member has their share of percentage or can say membership interest in the company. Any individuals, corporations, and foreign individuals can be a member in an LLC.
Ownership outlined is mentioned in a business operating agreement. The other details are the percentage of ownership, how the business activities will operate, and the process of dealing with new members or departments. In case, the LLP does not have an business operating agreement than LLC will operate according to the state laws.
Corporation owners are known as shareholders and they own a percentage of shares in a company that reflect the ownership. In a corporation, additional shares can be authorized easily and transfer of shares from one owner to another is simple.
Taxes
By default the corporations come in the category of C corporations. They can file tax in two ways, file a corporate tax return and pay corporate tax. If the shareholders received any amount then the amount is taxable under their personal tax return with the salary they received.
Some corporations register themselves as an S corporation to avoid double taxation. Here they don’t need to pay corporate income tax. Instead of that, the profit which is distributed among shareholders is taxable and they pay it as a personal income tax. To be registered as an S corporation, the number of shareholders should not be more than 100.
On the other hand, if LLC has a single member then it is treated as a sole proprietorship for taxation and if it has multiple members then it is treated as partnership. The members pay the tax on profits and self-employment taxes.
Note: Although, taxation is a complicated topic and you must take advice from experts to choose between LLC and corporation.
Legal Liability
Both LLCs or corporations have a benefit of limited liability. This means that in case of any debt or lawsuit against the business, owners are not liable for the liabilities of the business. If the owner signed a liability agreement and gives personal guarantee. Then in this case, the benefit of limited liability will not work.
To maintain the benefit of limited liability. Both the LLC and corporation owners must keep the business and personal finances separate. Also, the owner must sign any document or contract on the behalf of the company, and not on the personal basis.
For complying with the state regulations, the LLC and corporation must file the reports and maintain documents. Updated information must be maintained, some states require an annual report or franchise tax report to check the status of the business. The other requirements depend from state to state.
Management
An LLC can be managed by one or more members. These people can be members or managers but they can’t allocate themselves the traditional roles of the management such as CEO, vice president. But they can create a structure that works for the business needs.
In a corporation, there is a complete management structure such as board of directors, CEO, CFO, and other officers who look after the daily operations of the business. Once in a year, a meeting of shareholders is important. Keeping records of shareholders and directors is very important for corporations.
Key Points Before Choosing an LLP or Corporation
The following are the important points which should be considered before choosing any structure between a corporation and LLC:
- For small and mid-sized companies, LLC is a best option and for big companies where shareholders are more then you must opt for corporation.
- In an LLC you required less paper work and to form LLC you required huge paperwork.
- In LLC, single taxation is applied and for corporations, double taxation is implied. The corporation has to file a corporate tax return. And the shareholders will file the personal tax return on the amount received as a profit.
- Complete ownership in case of a corporation is provided to the owner. On the other hand, in a corporation, the ownership lies in shareholders but everything is managed by the management. In a corporation, the complete structure of management lies such as board of directors, CEO, CFO and others.
Conclusion
To conclude, both LLC and corporation have their own benefits and drawbacks. However, both have some similarities such as limited liability protection. However, the Internal Revenue Service (IRS) does not look to LLC as a separate entity for tax purposes, which is beneficial from corporations. Before choosing an LLC or corporation, you must take advice from experts because they suggest the best structure as per your business requirements.
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