Did you know that United States businesses employ over 128 million individuals? There comes a time in the life of many businesses where it just makes sense to begin protecting themselves from different liabilities.
The best way to do this is to form either a corporation or LLC. Both of these options help protect you as a business owner from the personal risk associated with your company. Unfortunately, many individuals aren’t sure which one is right for them because they’re unfamiliar with the differences.
Luckily, we’ve organized this article to provide you with everything you need to know about the two business entities. That way, you can decide once and for all which option is right for you. Let’s get started!
What is a Corporation?
A corporation is short for the word incorporated (or INC.). A corporation consists of a group of individuals that agree under federal law to act as a single entity. This helps spread apart some liability.
It also ensures that your business entity will have a perpetual life that’s not dependent on one individual. The owners in a corporation are known as members. There are two main types of corporations: C corporations and S corporations.
When a company first becomes a corporation it is a C corp by default. However, over time, if all the shareholders agree, then it can convert to an S corp. The differences between the two come down to ownership and taxation.
And S corp can’t have more than 100 shareholders, so it’s a little less flexible. However, S corporations avoid what’s known as double taxation. This occurs when C corporations need to pay both corporate income taxes on their profits and their shareholders need to pay personal income taxes on their taxes that come in the form of dividends.
What is an LLC?
LLC is an acronym that stands for limited liability company. As its name suggests, this type of business entity protects you from being held personally liable for anything that occurs within your business.
It’s helpful to think of limited liability companies as a hybrid between corporations and a partnership. It has a straightforward business agreement that comes with a partnership mixed with the liability protection of a corporation.
The owners of an LLC are known as members. Let’s take a closer look at how LLCs and corporations are similar and how they’re different.
How Are LLC and Corporations Similar?
Let’s go over some of the ways that LLCs and corporations are the same. Both are known as business entities and need to file with the state upon their formation.
In addition to this, both LLCs and corporations work to limit the amount of liability that can be placed on the shareholders or members, either by lawsuits or through business debts. In addition to this, both of these entities also have similar pass-through tax structures. This means that no income is paid at a business level.
However, keep in mind that this only applies to S corporations. C corporations must pay both. Finally, both of these entities are required to follow the regulations laid out by whatever state they reside in. That means doing things like paying fees and filing annual reports.
How Are They Different?
One of the biggest differences between LLCs and Corporations is their management. The management structure that comes with corporations is fairly strict. It requires a Board of Directors that’s in charge of long-term direction. Meanwhile, officers are used to handling day-to-day things. Meanwhile, LLCs are managed by their members.
In this way, it’s a bit more like a traditional business partnership. The corporation has a perpetual life. This means that if one of the shareholders leaves, dies, or files for bankruptcy, then the corporation continues to exist. LLCs, on the other hand, require their member approval to transfers ownership.
And, in certain states, if someone leaves, dies, or files bankruptcy, then they must dissolve. Corporations require a lot more recordkeeping than LLCs in the form of annual reports and shareholder meetings.
They’re also formed differently. Corporations are created by filing a document known as Articles of Incorporation in whatever state the business resides. Then, the shareholders must create a Board of Directors that will run the day-to-day operations while agreeing to bylaws.
An LLC is formed when one or more members files an Articles of Organization with their state. Then an optional Operating Agreement is put in place to detail the day-to-day operations. Make sure to check out this resource to answer the question, How long does it take to get an LLC?
Which One Is the Right Option For You As a Business Owner?
Now that you know more about LLCs and corporations you might be wondering which one is right for your specific business. Ultimately, the choice comes down to what you want out of the arrangement.
Small businesses that still want to be able to choose their partners should go with an LLC. The flexible management structure ensures that you maintain a degree of control when choosing members. Meanwhile, corporations are ideal for owners who want to one day seek investors outside of their company.
It’s also ideal for people who want to pass shares of ownership on to their employees. This is thanks to the eternal life that comes with corporations, as well the transferable nature of the shares.
Want More Content? Keep Reading
We hope this article helped you learn more about the difference between LLC vs corporations. When faced with this decision many individuals tend to overthink which option is right for them.
However, the reality is that choosing between an LLC and a corporation is a very simple choice. As a business owner, it should be clear which entity is the right option for your needs.
So, go with your guts and the right path will quickly become clear. Did you enjoy this article? If the answer is yes, then you’re in the right place. Keep exploring to find more topics that you’re sure to love.