LLC vs. Corporation: What’s the Difference?
If you are looking to get started on your business idea, backed by the proper legal papers or formalities and have your own business entity up and running, you have probably considered either going for a limited liability company (LLC) or a corporation.
A limited liability company and a corporation are the go to business entities to establish when one does not want to go down the sole proprietorship or partnership route.
To those who are not yet informed, a limited liability company and a corporation will look like one of the same things.
It is not strange to think that when both a limited liability company and a corporation have so much and even share so much in common.
Even with the similarities in place, there are several key differences between a limited liability company and a corporation that would make one more suitable as a business entity for your needs than the other depending on the circumstances at hand.
Below, we will differentiate a limited liability company from a corporation so you are aware of where the parallels are and where they end.
Similarities of Limited Liability Companies and Corporations
One of the most important aspects that an LLC and corporation has in common is that they are business entities that are formally recognized by the state governments as a legally official and regulated business.
To own, manage and operate any one of these business types will come with its respective advantages.
A by product of either having an LLC or a corporation is the confidence and trust it usually instills in your prospects, target market and clients.
This is not to say that business types considered as informal such as sole proprietorships or general partnerships are not worthy of confidence or trust though in making a sale, appearances with good impressions are powerful.
The prime purpose of establishing either a limited liability company or a corporation is for the protection it grants to its owners’ personal assets.
Both limited liability companies and corporations have corporate veils.
Corporate veil is the term that is most commonly used to refer to the barrier created between the assets of a company and the personal assets of the owners of the company.
It is for this reason that business owners choose to form either a limited liability company or a corporation.
How the division of assets work to protect the company owners is by preventing the seizing of their personal assets in settlement, reimbursement, or overall satisfaction of the liability judgement ruled against them if ever that situation arises.
In the event of a lawsuit, the personal assets of the owners are safe unless those very owners committed gross misconduct, fraud, professional negligence or other forms of malpractice that would eliminate the corporate veil established between the company and the offending member or owner.
Likewise, any defaults or failure to pay debts or other financial obligations of the company will only put the assets of the company at stake which secures the personal assets of the owners or members involved in the company.
Another vital parallel between a limited liability company and a corporation is the fact that their names are protected.
Once a limited liability company or a corporation is formed under a given registered business name, no other entity can use that business name in the business’ presiding state.
In most cases and in most states, other entities cannot have names that are deceivingly identical to an LLC or corporation protected business name.
It is this security over a business’ name that avoids confusion and keeps the identities of formal business entities separate and distinct.
Limited liability companies and corporations are also similar in the sense that the business can be owned by other companies such as being the property of a parent corporation.
However, not all corporations share this similarity.
S corporations do not permit the ownership of its business by other entities in most cases.
Advantages of the Limited Liability Company
A limited liability company has different taxation policies in place compared to a corporation.
Limited liability companies have what is considered a flexible approach to taxation as it allows its members to choose what kind of taxation policy to enforce.
Members of a limited liability company can choose to be taxed as a pass through entity or be taxed as a corporation.
If the members choose the pass through entity option, they will have to report their share of the company’s earnings and from there, they will pay tax accordingly.
In certain cases, members or owners are entitled to 20% pass through deductions on qualified business income reflected on the respective member’s personal taxes.
It should be noted that tax regulations will still need to be observed such as the limits on taxable income for example.
If members choose to be taxed as a corporation, then they will pay taxes on a corporate level which is more complex and expensive in nature.
Corporate taxation can be complicated.
Corporate taxation is known to be more expensive to pay since C corporations are subjected to a policy that is also known as double taxation.
After collecting and receiving its gross profits, a corporate entity will need to pay corporate or business tax.
From the net profits, the dividends will be distributed among the owners of the corporation.
From those distributed dividends, the owners will need to pay taxes from the very same profits that were already corporate taxed but this time, they will declare and settle their taxes on their personal tax returns.
This is why C corporations are said to face double taxation.
S corporations on the other hand are much like limited liability companies in the sense that it is taxed like a pass through entity.
Something to consider is the paperwork mandated to be accomplished in order to stay compliant to the business’ regulating agencies.
LLCs have fewer paperwork regulations that call for its proper filing, compiling and submissions.
Corporations on the other hand have quite an extensive amount of record keeping, documentation and overall paperwork that is required to be complied with which often leads to the need for licensed or qualified professional services to have these tasks accomplished.
Limited liability companies do not have the maintenance processes and operations that corporations mandate.
Yearly, a corporation has to hold meetings for its shareholders and directors with the minutes of each meeting having to be recorded.
Limited liability companies can hold meetings though it is optional just like it is optional to have the minutes of the meeting comprehensively documented.
For many business owners, it is the relative simplicity with its relatively low upkeep that makes forming a limited liability an advantage with some having it as the deciding factor for establishing their own LLC.
Advantages of the Corporation
Funding the business especially from external investors is easier and faster to do in a corporation type of business entity compared to an LLC.
On top of being able to issue out corporate bonds, corporations can also issue stocks which is something a limited liability company cannot do.
A significant percentage of private investors tend to prefer investment vehicles in the form of stocks.
In addition, if one of the tasks you are aiming to accomplish for your business is to attract the involvement of venture capital investors, you will have a better chance of accomplishing said task if you form a corporation instead of a limited liability company.
It is an absolute rarity to see venture capital investments in an entity that is considered as pass through such as that of a limited liability company.
A corporation will be the better choice if you are also after having a more polished and established business type.
It is through a corporation that the legalities are more consistent with a hefty amount of precedents from the courts.
For some, it will be important to consider that corporations have been existing for the past few centuries while limited liability companies on the other hand only gained nationwide acceptance and formal recognition in the mid-1990s.
Which is the Right Choice for You?
Individual circumstances will dictate which business entity will be more suitable over the other.
There are situations that will be the deciding factor on whether a limited liability company or a corporation is the better option.
If you have the vision, mission and aspirations to greatly expand, grow and develop your business then forming a corporation would be the more suitable choice for you.
Unlike forming an LLC, as a corporation you will have access to more financing options with not only having a higher chance at attracting investors but also being able to attract several kinds of investors from stock owners to venture capitalists and more.
If you are aiming to operate on a high scale, major operations kind of level instead of settling for running a small business, forming a corporation will be worth your while to look into.
On the other hand, if you are looking for lower costs to start up your operations and have an easier entry into a formalized business type, the limited liability company option would be suitable for you.
Even down to taxation, the corporate tax rate is at 21% which is higher than the bottom two individual tax brackets of 10% and 12%.
There are also the next two brackets of corporate tax to consider at 22% and 24%.
With the advantages that a limited liability company can grant you as a pass through entity, having an LLC can cut your costs and save you money on taxes in the event that you and your co-owners make less than $160,700 each per annum.
Having so many parallels and similarities in common can make the deciding process of whether to form a limited liability company or a corporation a bit confusing.
What will be the better option is to form a business entity that directly addresses the current needs of your business.
Your best bet will be a limited liability company if you would like to opt into tax flexibility, lower upkeep requirements and lower costs to get your business started.
Your best bet will be a corporation if you have massive operations you are planning to operate and you would need the help of external investors in order to raise higher capital requirements.
Individuals in the higher income brackets will also be able to take advantage of the corporate tax rate.
With all this in mind, the majority of small businesses made in the USA do tend to form LLCs either through limited liability company formation services or through filing the articles of organization or certificate of formation on their own to their presiding regulating body or state.