Back to Basics: The Difference Between an LLC and Corporation

Back to Basics: The Difference Between an LLC and Corporation

Filing your business as a legal entity with the state is a huge step for new small business owners. Owners of both corporations and LLCs have limited liability protection, savings on taxes, and the opportunity to let their customers know that they are providing their business to a legal, professional entity in the state. However, there are sevral key differences between the two. Entity ultimately depends on the business owner to determine which company will be best suited to their business needs

Forming an LLC

Forming a limited liability company (LLC) provides benefits for a variety of businesses. One of the most popular are real estate, consulting firms and partnerships. LLCs have a reputation for being “simple” entities. The startup is simple, and the management structure itself is quite simple. There isn’t a lot of paperwork and hassle to get started and run an LLC. Additionally, they are quite affordable to start with compared to a few other options available to small business owners.

Running LLC

Other benefits include: Protecting your personal assets through liability protection (like a corporation), having the ability to reduce certain costs, reducing your audit risk, and establishing trust with customers. The biggest draw of LLC is going through taxes. LLCs are independent legal entities but not separate tax entities (e.g., income taxes for LLCs are reported and paid on the owners' personal income tax returns). So they are taxed only at one stage, where corporations experience double taxation once at the company level and again at the owner level.

Corporation formation

Corporation formation is more comprehensive than LLC formation. Not only will you fill out more paperwork, but you will need to pay special attention to the language of the paperwork. For example, if your corporation is engaged in what your state can call a "professional service," the articles in the article must carry special language and form the corporation in accordance with certain statutory rules. According to most states, "professional services" are usually made up of: medical services, legal services and presentation, accounting and financial services, architectural services, among others - depending on the status of your inclusion.

It is important to note that most states vary with their requirements regarding the licensing of professional activities. So it’s always a good idea to consult an attorney if you fall into your state’s “professional service” rules.

Running the corporation

Like LLCs, corporation structure draws a line between owner's personal and business assets, helping to protect your personal assets from the risks or debts associated with running the business. This means that if the business cannot pay or sue a creditor, the creditor cannot legally return the member's personal property, such as their home or car, under the law.

The management of a corporation is a bit different than the management of an LLC. Owners of the corporation is called shareholders. Managers are responsible for long-term management and make big decisions regarding the corporation. Officers are responsible for the day-to-day operations of the corporation and are usually composed of the president, secretary and treasurer.

Corporations also have stock options. You can choose to connect your business to raise capital and provide employees with stock options. Additionally, you can have unlimited shareholders when you join a business.