If you’re considering starting a business, then it’s possible that you’ve considered both the LLC and the corporation for your entity type.
To the untrained eye, LLCs and corporations look the same. And it’s true that the two business types have a lot in common. That said, there are key aspects which make the two unique. In this guide, we’ll cover both the similarities and differences between LLCs and corporations.
Similarities of LLCs & corporations
LLCs and corporations are both incorporated entities; they are recognized by the state government as official, regulated businesses. Being incorporated has its own benefits; the formality of incorporation tends to instill confidence in the business. That’s not to say that unincorporated businesses aren’t trustworthy; but appearances are powerful.
Incorporated businesses also have another advantage: their names are protected. Once a business incorporates under a given name, no one else can use that name. In most states, the names of businesses can’t be “deceptively similar.” This avoids confusion, and it keeps the names of LLCs, corporations, and other incorporated businesses unique.
The primary reason people choose to incorporate as an LLC or a corporation is for personal asset protection. Both LLCs and corporations have what’s commonly referred to as a corporate veil. The veil creates a barrier between the business’s finances and the personal finances of the owners and members of the business. The division of finances protects the members in case of a lawsuit or debt. Unincorporated entities, such as sole proprietorships, do not have this protection.
Finally, both an LLC and a corporation can be owned by other companies (i.e., be the property of a parent corporation). However, if an S corporation does not share this similarity. S Corporations cannot be owned by other businesses.
Key differences between LLCs & corporations
First, LLCs and corporations face different taxation policies. LLCs have a flexible approach to taxation. It can choose to be taxed as a pass-through entity (also called a disregarded entity) and have its members pay taxes on their personal tax returns. The other option would be to be taxed as a corporation.
Corporate taxation is a bit complicated, and it’s widely considered to be more expensive. Corporations face double taxation. The corporation’s income is taxed twice: first, the entity pays the tax as a business, and then the members pay taxes on the dividends they receive from the business.
Another difference between LLCs and corporations is how much work the business has to do to stay compliant. The paperwork and record-keeping necessary for a corporation is extensive. For example, each year, the corporation has to hold meetings for its directors and its shareholders. Minutes from each meeting must be recorded, too. And then there’s the matter of annual paperwork, which is a hassle. LLCs, however, are much easier to maintain. LLCs do not have the same paperwork, and annual meetings are optional. For many businesses, the sheer simplicity of running an LLC each year is the sticking point.
Attracting external investors in an LLC is much harder than a corporation. After all, corporations can issue shares of stock. LLCs can’t. Many private investors prefer stock as their investment of choice. The shares of stock often carry voting rights, which gives the investor an impact on the corporation’s business. LLCs can offer investment options, but attracting investors who will forego the voting rights is harder.
The management structure of LLCs and corporations looks different, too. Directors run a corporation, but those directors are elected by the shareholders at their annual meetings. The directors appoint managers to handle the day-to-day affairs.
The corporation’s tiered management structure is a bit more complicated than the management for an LLCs. Members (i.e., the owners) typically manage the LLC on their own. In a way, an LLC’s members act as both a director and a manager simultaneously. If a member wants to own the business without running it, the LLC can choose to appoint managers. There are no shareholders in an LLC.
Since LLCs and corporations have a lot in common, it can be tricky to decide which type is right for your business. Ultimately, the choice boils down to your preference. An LLC is best if you prefer tax flexibility and simple maintenance. The corporation is your go-to if you’d rather raise funds through investments.
Whichever type you choose, we wish you the best as you start your new business!