When you start your own business, you have lots of confusion about which form of business entity is excellent and suitable for you.
And when you are here, you are landed on the right page as we discuss the comparison between LLC and Corporation.
It is usual when small business owners who start a business go for a comfortable type of business entity such as LLC or a corporation that keeps them safe and their funds secure.
Incorporating a business entity starts from the primary type, which is a sole proprietorship or a partnership.
Still, it always refers to a legal business entity separate from its members when it comes to a company or corporation.
The shareholders own it until its final existence.
But which one should you choose is still a big question?
How great it will be when you know the difference between an LLC and a corporation when you are about to start.
For instance, you are going for a Pizza franchise, but you don’t know what to call it a Pizza LLC or a Pizza Inc.
So let’s make your beginning worthy by letting you know which one suits you the most?
We have got specific categories in which we are differentiating LLC and Corporation.
They are Taxation, Liability, Management, Ownership, and lastly, Compliance Requirements.
And you will soon find out the similarities and differences between LLCs and corporations.
Let’s start by defining what it means to form an LLC or Corporation.
Incorporation vs. LLC – Separate Entity Status
It is a form of a legal business entity separate from the owners and the shareholders who will donate until it gets dissolved.
In this form of business, the production and selling activities take place on a large scale, but the members are liable up to some extent only. Their personal property remains separated from the business’s asset, and the company or corporation cannot use it to pay the company’s debts.
The same goes with the LLC; it is also a legal entity with a separate and distinctive existence from its creators and members. The members’ liabilities are limited to the predetermined limit so that their funds remain safe even in liquidation and dissolution.
LLC vs. Inc – Formation
Corporation formation and an LLC formation have both similarities and differences.
Both the business entities are formed by filing a document that contains specific information to the Secretary of State for the filing authority of your choice of state or country.
That filed document is Articles of Incorporation in case of Corporation and Articles of Organization in case of LLC.
After that, you have to draft bylaws for your corporation, and if it is LLC, you need to form an operating agreement for members.
No coming to some differences between these documents so that you are aware while making the crucial decisions regarding your choice of business entity.
Generally, The Articles of Incorporation are more informative and are used to opt-out of or amend some specific statutory requirements that the corporation will be subject to otherwise.
Also, some governing provisions have to be included in the Articles to make it more effective.
Coming to the LLC’s Articles of Organization for an LLC contains the lesser required information and almost all the provisions regarding how it will manage.
The liabilities, rights, and duties of managers and members are there in the Operating Agreement.
Both The Articles of Incorporation and Articles of Organization are public documents. But, The operating agreement is not a public document.
So, in case opting between LLC and Inc. and you want to keep information less of business’s internal matter to the general public, then LLC will be the best choice for you.
LLC vs. Corporation (Limited Liability Protection for Owners)
After studying and researching a lot, we find out that people opt for forming a corporation or LLC to avoid personal liability for the business’ debts.
And as mentioned earlier, Corporations and LLCs have their separate legal existence. But it will be the Corporation or LLC that owns the business and all the assets, liabilities, and debts.
The shareholders or members are the groups of people who own the corporation or LLC, and they are liable for their investment only.
The liabilities of Limited shareholders and members are well-established and respected rules. But it doesn’t mean they aren’t liable for anything ever.
They’re still responsible for their own misbehave, for instance, if they breach the terms mentioned in the operating agreement.
And owners are also held liable for certain activities, for instance, if there’s a statute that holds them liable.
Members and shareholders can be held liable for the company’s debts in a legal concept recognized as “piercing the corporate veil.”
Veil piercing is a remedial solution in which courts will disregard the Corporation or LLC’s separate existence.
When the entity is no longer in the scene, the members and the shareholders become liable for their debts.
So, in this LLC vs. Inc., You can judge this round even.
LLC vs. Inc – For Taxation
You can see one of the key differences between a corporation and an LLC at the time of taxation. And in this category, taxation will not be in favor of LLC nor corporation.
An LLC is famous for being a pass-through business entity for federal income tax purposes, which means it does not have to pay any federal income tax. And, all its profits and losses directly go to the owners.
Business income is equal to personal income, so the owner pays the tax on their income at the individual rate. As long as the members pay tax, there is a single level of taxation.
And a single level of taxation is a good thing, but it doesn’t guarantee whether being taxed as a part of an LLC is better for you or not.
In certain circumstances, LLC owners can earn a substantially increased tax bill by including the self-employment tax (currently at 15.3 percent).
And it also depends on whether the corporate or the personal income tax rate is higher or not and the exemptions and deductions the owners are entitled to.
Pass-through taxation is the default and mandatory rule. If you do nothing related to tax, the revenue department will treat your LLC taxation as a partnership firm under Subchapter K of the Internal Revenue Code.
This case is only applicable if you have more than one member or your LLC has been wholly disregarded for income tax purposes if you are the only member.
For corporations, there are two ways for income tax purposes. C-corporation is named C-corporation because the taxation falls under Subchapter C of the Internal Revenue Code (IRC).
C-corporations are liable for double taxation, whereas S-corporations are subject to single taxation.
A Corporation is a separate taxable entity where all the business profits and losses are taxable to the corporation, not to the owners.
Consequently, Corporations are taxed only at the corporate rate. If the corporation distributes profits to the shareholders, the shareholders’ income has to report it in their income tax return in the form of a dividend.
Yet, It’s a double tax, and it can seriously reduce the real dollars earned in the end.
LLC vs. Inc – Post-Formation Compliance
Both LLCs and corporations have to fulfill certain obligations to stay in their formation states’ excellent list.
It includes paying franchise taxes, filing an annual report, and appointing and maintaining a registered agent and office in continuity.
An annual report contains information about the company like its name, address of the principal office, name, address of the registered agent, and its managing officials’ names and addresses.
In some states, it is a biennial requirement in place of an annual requirement.
A franchise tax is a state’s fee that allows a company to stay in existence and do business in a Corporation or an LLC and enjoy all the advantages, like limited liability.
If you fail to file an annual report or pay compulsory franchise taxes, it will bring you some penalties such as the loss of good ranking status and lead to administrative dissolution.
These are applicable for both Corporations and LLCs.
LLC vs. Inc – Registered Agent Compliance
Whether you go to a Corporation or an LLC, it is mandatory to appoint and maintain a registered agent in your formation state, in every state where your company is qualified and has a business branch for doing business.
A best registered agent is appointed to collect and forward documents related to the process and some official communications from the state.
The service of process is the delivery of legal documents. Both Corporations and LLCs must do this Neither gains the upper hand in Corporation vs. LLC.
Remember that it is an important decision, and if you choose the wrong registered agent, it can lead to consequences for your company that are not good, like loss of good ranking or a default judgment.
That’s why, in our recommendation, appointing a registered professional agent is one of the essential jobs that you should do carefully.
LLC vs. Inc – For Management
Corporations and LLCs both have different management structures.
Management is taken care of by both the statute and the governing documents like Articles of Incorporation, bylaws for a corporation for Corporation form of business entity or Articles of Organization and operating agreement for an LLC form of business.
Corporation laws have more management requirements as compared to LLC laws. A Corporation has to hold annual shareholder meetings, hold director’s meetings, provide notice, and so much more.
A corporation’s director must be a natural person, and a proxy cannot vote for him. Many LLC statutes leave it to the members to mention how they will be managing the firm in their operating agreement.
For instance, meetings are not compulsory to organize, managers don’t have to be natural persons, and they also can be voted by a proxy.
It brings an LLC owner a degree of flexibility in managing things that don’t happen in a Corporation case. A board of directors looks after all the business affairs and takes all the major business decisions in a corporation.
The board recruits officers who are given responsibility for the day-to-day operations and running of the business.
Management of Shareholders is a minimal function and includes some things like electing directors and voting on significant transactions, and more.
Whereas an LLC has two management structures, it can be Member-Managed, where all members participate in the decision-making process.
And the second way is it can be Manager-Managed, where members, such as shareholders, are investors carrying limited management functions.
In the managers-managed structure, the business affairs and the manager’s role is similar to that of corporate directors.
LLC vs. Inc – For Ownership
When it comes to ownership, both Shareholders and Members have financial and management rights.
Plus, the management rights include the right to inspect the corporation’s books and records and develop a derivative suit for the corporation or LLC.
Financial rights are the right to get a share in the profits as dividends and distributions at the time of its dissolution. In the case of a corporation, the rights of the Shareholders depend on their stock ownership.
In case when a Corporation has issued a dividend of 10 cents on a share, all shareholders are eligible for getting 10 cents per share.
Although, in an LLC, the members can divide the rights so that a particular member can get more dividend than others. That financial flexibility is also a plus point in favor of the LLC as differentiated with corporations.
LLC vs. Inc. (Classes and Transferability of Interests)
The shares of a Corporation are easily transferable to others. And it also makes Corporations a right choice for opting as a business as it seeks investment from outside or a public stock offering.
It’s not easy to transfer LLC membership interests as happens Corporate stock. In LLCs, the consent of the other members is mandatory before you bring in a new member.
Corporations are a great option to choose when we talk about transferring or selling an ownership interest.
LLC vs. Inc – For Recordkeeping
Record keeping is an essential requirement for both Corporations and LLCs. Various records like the governing documents, individual tax returns, and shareholder and member lists have to be appropriately maintained.
And Shareholders, Members, Directors, and Managers must have a statutory right to inspect those documents whenever they want.
Plus, Shareholders and Members can also demand to inspect other records if they come up with a real purpose and follow specific statutory procedures.
Make Your Choice: LLC vs. Inc.?
We’ve discussed this so far and so well on this topic, and I hope you are now capable of comparing them very nicely and might’ve made yourself clear about the same.
And as per the discussion, both Corporations and LLCs have some similarities and some differences.
Now, it’s your decision which kind of business entity suits you the most, and you can go for it.