What is the Difference Between a Limited Liability Company and a Corporation?
Congratulations! You have started a business. Now you need to decide what type of entity is best for your business. When starting a business, a business owner must first choose which type of entity to create. Two of the most popular entity types are the limited liability company (LLC) and the corporation. But which one is right for you and your business? To choose the right one for your business, you should be aware of their similarities and differences.
Limited liability companies and corporations are types of legal business structures. Both of these legal structures provide limited liability. But what does that mean for you? How do you know which is the right entity for you?
Let’s fist talk about limited liability. What does limited liability mean anyway? Limited liability means that as a business owner, you are protected more. Why? Because with a limited liability company, your are not personally liable for the business’s liabilities or debts. However, there are some exceptions.
So what is the main objective? The goal is protecting a business owner’s from personal liability for the business debts and liabilities.
LLCs and corporations require a business owner to register the entity with the Secretary of State. LLCs file a document called Articles of Organization. Corporations file Articles of Incorporation. Both of these Articles list the name of the business, the purpose of business, who the registered agent will be and business contact information. The Secretary of State must then approve your Articles before you are a valid entity.
Also, both LLCs and Corporations must file Annual Reports every year with the Secretary of State. Otherwise, these entities will not be a valid, legal business.
We mentioned how LLCs and Corporations are alike. Now we will discuss how these two entities differ.
The LLC is a newer entity structure. LLC’s provide more flexibility than corporations. Here are some of the key differences between these two entities:
Corporations and LLCs have different naming requirements. In North Carolina, an LLC’s name must contain the words “Limited Liability Company,” or the abbreviation “L.L.C.” or “LLC”, or the combination “ltd. Liability Co.” or “ltd. Liability company.” Whereas, the name of a corporation must end with “Incorporated” or “Corporation. Corporate names may also contain the abbreviation “corp,” “inc.” “co” or “ltd.”
LLCs and corporations have different ownership structures. The owner of an LLC is typically called a member. The member’s ownership interests are usually defined by a percentage. Unlike a corporation, LLC ownership does not have to reflect a member’s contribution of money or property to the LLC.
On the other hand, the owner of a corporation is called a shareholder or stockholder. A corporation’s ownership is called shares or stocks. Voting rights, profits and losses are based on the number of shares held.
LLCs and corporations also differ in their management. LLCs are either member-managed or manager-managed. In manager-managed LLCs, the members conduct the day-to-day management of the LLC. In manager-managed LLCs, one or more managers, has the authority to make decisions for the entity. The managers may or may not be members of the LLC.
In corporations, by default, a board of directors has management authority. The board is answerable to the shareholders. Additionally, the board handles the day-to-day management functions.
The members of an LLC also have the flexibility to choose to create a board of managers similar to a corporation’s board of directors.
A major area of distinction between corporations and LLCs is the tax structure. LLCs enjoy pass-through taxation. What does pass-through taxation mean? With pass-through taxation, an LLC is not taxed individually. Instead, the LLC distributes its profits and losses amongst the members per their ownership interests. The members then report their share of the LLC’s profits and losses on their own individual tax returns.
Foe multi-member LLCs, the Manager. prepares a Schedule K-1. The Manager then gives each Member a Schedule K-1 by March 15th of each year the LLC is in operation. The members attach the Schedule K-1 to their individual tax returns.
LLCs can opt to be treated as an S-Corp for taxation purposes. If this option is selected, a business owner only pays taxes on his or her salary. The remaining corporate profits are not subject to taxes. As an S-Corp, an LLC can also potentially save money on self-employment taxes.
Corporations on the other hand, are subject to double taxation. This means the corporate entity must pay taxes on corporate income and the corporation’s shareholders must also pay taxes on the dividends they receive.
LLC’s are less formal than corporations. Corporations must hold two types of meetings every year. An annual meeting of shareholders is required. Also, an annual meeting of the board of directors is required. Minutes must be written and kept of these meetings.
LLCs, on the other hand, do not have such meeting requirements. LLCs also do not keep minutes.
We Are Here to Help
Choosing between these two legal entities requires a great deal of consideration and depends upon your unique needs and goals. If you need assistance weighing the risks and benefits of each business type, please contact us today. Our attorneys are ready and available to provide the analysis you need to make the best decision for you and your business.