Both LLCs and corporations are ideal business structures that provide business owners with personal liability protection. However, when deciding between the advantages and disadvantages of a corporation and an LLC, there’s a lot to weigh.
There are three key areas where these two business entities differ greatly: corporate structure, management, taxes, and tax benefit. What’s more, both offer distinct tax advantages to the business owner depending on their business goals.
It’s important as a business owner to understand these differences while learning how to start a corporation or an LLC, so that you can take your businesses in the best possible direction. Let’s dig in.
One of the biggest differences between an LLC vs corporation is their respective structures.
Whereas a corporation is owned by its “shareholder,” the owners of an LLC are called “members.”
Though seemingly small, this distinction greatly impacts how ownership is transferred. Let’s break down this distinction even further.
LLC owners are known as “members” because they own a percentage of the business—their “membership interest.” However, just because LLC owners own this percentage doesn’t mean they are free to transfer their ownership whenever they please—many LLCs impose transfer restrictions.
On the one hand, transfer restrictions benefit smaller operations because, in most cases, they prohibit the LLC member from potentially dissolving businesses by simply transferring their ownership.
Yet, on the other hand, transfer restrictions limit a business’s ability to attract investors. This is because LLCs, unlike corporations, are subject to dissolution in many states if a partner dies, leaves, or files for bankruptcy.
If an LLC or a Limited Liability Company is intended to protect a small business from the decisions of a single partner or a single member LLC, a corporation benefits a large venture by growing its pool of investors. This is because it’s far easier to transfer ownership in a corporate structure than an LLC.
In a corporate structure, whether it is a C vs S Corporation, owners are known as “shareholders” because they have the ability to buy and sell shares to increase or decrease their respective positions in the company. In publicly traded companies, anyone can own a percentage of a company simply by purchasing a share.
Although LLCs have a more difficult time attracting investors, their less rigid management requirements are definite boons to small businesses.
For example, unlike corporations, LLCs don’t have to have a board of directors nor do they have to adhere to management structures that require officers to run the business’s daily operations.
Corporations, however, are regulated when it comes to management. In general, corporations must include the following in their management structures:
In short, if you’re a small business with only a few partners, the less formal management style associated with an LLC or Limited Liability Company may be more appealing.
Whichever management style you choose, you’ll want to keep communication at a high level. That’s where GOV+ comes in. With hassle-free information formatting, GOV+ makes it easy to send information exactly where it needs to go.
Another major difference between an LLC and a corporation is the way both structures are taxed.
Put simply, upon incorporation, a business automatically becomes a C Corporation. This means that a corporation is subject to double taxation—once for the business income the company takes in and again for the dividends the shareholders take in.
However, there’s a way around double taxation: forming an S Corp. In this tax designation, a corporation passes its business income straight to the shareholders. In other words, the company doesn’t pay a corporate tax—only the shareholders do in the form of personal income tax.
LLCs don’t have the same tax restrictions. If they’re composed of a single LLC member, they’re taxed like a sole proprietorship. If they’re composed of multiple partners, they’re taxed like a limited partnership. They can also apply to be taxed like C corporation and S Corporation.
LLCs can be particularly advantageous for a small business owner. This is because their strict ownership transfer requirements mean that the actions of a single partner can’t threaten the business’s stability.
In addition, LLCs can benefit owners who are looking for the following:
On the flip side, an S corporation or C corporation may be the right way to go for larger, thriving businesses. The benefits of corporation vs LLC include the following:
There’s a lot to think about when it comes to choosing between an LLC and a corporation.
If you’re a smaller operation that values a less formal management structure, an LLC may be the right structure for your business. But, if you want to attract as many investors as possible, a corporation is the way to go.
To avoid having to set up a corporation or LLC in person, simply fill out this form to apply for a corporation or LLC online right now.