LLC vs. Corporation: Differences, Regulations & Similarities

• March 13, 2024
• Information

A business entity is an organization that engages in commercial, industrial, or professional activities. There are various entity structures to choose from, and each type has its unique structure, rights, and responsibilities.

Two of the most common types of entities are the corporation and the limited liability company, or LLC. A business owner may choose an LLC for its simplicity in management and taxation, as well as its flexibility in ownership and profit distribution.

On the other hand, a corporation may be a better fit due to strong liability protection, the ability to attract investors through the issuance of stock, and potential tax advantages, such as deductions for employee benefits. Here is a guide to LLCs vs. corporations, their similarities and differences, and which entity type might work best for your business.

Limited Liability Companies

The LLC is a well-known business structure that combines the liability protection of a corporation with the flexible management and tax treatment of a partnership. LLCs are a common choice for small businesses and startups due to their simplicity.

• Formation. LLCs are formed by filing Articles of Organization or Formation with the state and paying the required fees. Operating agreements, while not always required by state law, are highly recommended to outline the management structure and operating procedures of the LLC.
• Ownership. LLCs can have one or more owners, known as members. One of the main differences between an LLC and a corporation is that in an LLC, membership interests represent ownership rather than shares of stock.
• Management. LLCs can be managed by their members (member-managed) or appointed managers (manager-managed). In a member-managed LLC, all members participate in the day-to-day management and decision-making of the business, whereas a manager-managed LLC appoints one or more managers to handle the day-to-day operations and decision-making. Related Information: LLC Member vs LLC Manager
• Taxation. LLCs offer the benefit of pass-through taxation, where profits and losses are passed through to and reported on the member personal tax returns.

Overall, LLCs offer a balance of simplicity and protection, making them attractive to small businesses and startups looking for a versatile and easy-to-manage structure.

Benefits of LLCs

LLCs offer several advantages, making them attractive to many potential business owners. One key benefit is limited liability, which protects the personal assets of LLC members from the debts and obligations of the business.

If the business is sued or accumulates significant debt, the members would not be personally liable to cover them. Additionally, LLCs benefit from pass-through taxation, allowing members to report profits and losses in their personal tax returns and avoid double taxation, which many corporations are subject to.

Another advantage is the flexible management structure of LLCs, which can be managed by their members or appointed managers, providing versatility in decision-making. Finally, forming and running an LLC is relatively easy and inexpensive compared to corporations, as it involves fewer formalities.

Drawbacks of LLCs

Despite its advantages, LLCs also have certain drawbacks that potential business owners should be aware of. One significant drawback is the issue of self-employment taxes, as members of an LLC are usually considered self-employed and are subject to self-employment taxes on their share of the LLC’s income.

Another concern is the limited life of an LLC in some states, where the death or withdrawal of a member can result in the dissolution of the LLC unless the operating agreement specifies otherwise. Additionally, while LLCs offer pass-through taxation, they can be subject to complex tax rules, particularly if they have multiple members or choose corporate taxation.

These drawbacks highlight the importance of carefully considering the implications of choosing an LLC as a business structure and seeking the advice of a business formation attorney like the team at BrewerLong.

Corporations

A corporation is another legal entity completely separate from its owners. They have a more complex structure than LLCs and require more formalities, such as shareholder meetings and the issuance of stock. However, there are several reasons why you might choose a corporation over an LLC, depending on the business’s specific goals, financing needs, tax considerations, and long-term strategy.

• Formation. Corporations are formed by filing Articles of Incorporation with the state’s business formation agency and paying the required fees. Most states, including Florida, require corporations to draft bylaws outlining the corporation’s management structure and operating procedures.
• Ownership. Corporations have shareholders who own the company by holding shares of stock. One of the key differences between a corporation and an LLC is that shares of stock represent ownership in a corporation.
• Management. Larger corporations generally have shareholders elect a board of directors, who appoint officers to oversee daily business operations. However, in closely held corporations, shareholders often participate in the day-to-day management and decision-making. Some corporations may not qualify as a closely held corporation, so speak to an attorney to see if this structure is appropriate for your business.

C vs. S Corp Designation

After formation, a corporation can remain a C corporation or file an election to qualify as an S corporation. C corporations are subject to corporate income tax at the federal and state levels and offer more flexibility in ownership and structure. They are also subject to double taxation on profits and shareholder dividends.

On the other hand, S corporations (like LLCs) are pass-through entities. S corporations do have specific eligibility requirements, such as a limit on the number of shareholders and restrictions on who can be a shareholder, which can limit what the corporation wants to do in the long term.

Benefits of a Corporation

Corporations offer limited liability protection, shielding shareholders’ and officers’ personal assets from business debts and lawsuits, which can be vital for businesses with high liability risks. Additionally, corporations can continue to operate even if ownership changes or shareholders pass away, creating stability that can be attractive for long-term business planning and investors. Furthermore, corporations can raise capital by issuing stock, making them an ideal choice for businesses seeking to expand or attract investors. 

Corporation Drawbacks

There are some drawbacks to the corporate structure that potential business owners should consider carefully. C corporations are subject to corporate income tax on their profits, and shareholders are taxed again on any dividends they receive. Some corporations may qualify for pass-through taxation by selecting an S corporation election with the IRS. However, the election only applies to certain businesses that meet the requirements.

Additionally, corporations are subject to more complex legal and regulatory requirements, such as holding regular shareholder and director meetings, maintaining detailed financial records, and complying with state and federal regulations. Finally, corporations have less flexibility in management and decision-making, as they are governed by a board of directors and officers, which may not be suitable for your business.

Choosing Between a Corporation vs. an LLC

Choosing between a corporation and an LLC is a critical decision for a potential business owner, as each structure has advantages and disadvantages that can significantly impact your business’s operations, taxes, and liability protection. Here are some things to remember as you consider the best structure for your business.

Capital 

If the business plans to raise capital by issuing stock to investors, a corporation may be a more suitable choice. Corporations can issue different classes of stock with varying rights, attracting investors seeking certain levels of control and return on investment. Additionally, corporations can offer employees stock options and other equity incentives, helping to attract and retain top talent.

Tax Considerations

While corporations and LLCs offer pass-through taxation options, corporations have more flexibility in structuring their tax strategies. For example, C corporations can retain earnings within the company and pay taxes at corporate rates, which may be lower than individual tax rates. Also, certain deductions and benefits are more favorable for corporations, like employee benefits.

Transferability of Ownership 

Transferring ownership in a corporation is typically easier than in an LLC, sinceas shares of stock represent ownership interests, which can be easily bought, sold, or transferred.

Expanding Operations 

While all states recognize LLCs, a corporation may be a better choice if you plan to expand your business internationally. Corporations are a recognized legal structure internationally, and this structure can conduct business in foreign jurisdictions more easily than LLCs. This can be advantageous if you anticipate expanding globally or engaging in cross-border transactions.

Entity Stability

Corporations have perpetual existence, meaning they continue to exist even if the ownership changes or a shareholder dies. Perpetual existence provides more stability and continuity for the business, making it an attractive option for long-term ventures or investors with a long-term vision. With LLCs, state law or the operating agreement might require the sale or dissolution of the entity if a member dies or cannot continue in the business.

Employee Benefits

Corporations can offer certain employee benefits, such as stock options, retirement plans, and health insurance, which may be more attractive to employees. Offering additional benefits can help businesses attract and retain top talent in a competitive market.

Contact Us

Picking the correct entity structure to fit your needs is crucial when e starting a business. The business formation team at BrewerLong can discuss the benefits and drawbacks of each type and help you pick the entity that best fits your wants and goals.

After formation, we can support your Florida business through a wide range of transactional matters and help you navigate legal disputes that arise. Call us today to schedule a consultation, or fill out our online contact form to get started.

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Michael Long

Michael Long, a distinguished Business and Litigation Attorney at BrewerLong, brings a unique blend of tenacity and insight to his practice, honed from his time as a decorated combat veteran in the Marines. Specializing in complex litigation, Michael adeptly navigates the intricacies of business break-ups, professional liability, and a wide array of disputes encompassing tax, trust, real estate, contract, intellectual property, and loan issues. His expertise extends to business counseling, where he skillfully handles commercial contracts, company creation, intellectual property challenges, and more. Michael’s approach is holistic; he leverages his transactional and litigation experience to foresee and tactically address both immediate and long-term client needs, ensuring practical, cost-effective solutions that maximize benefits while minimizing risks. His commitment to excellence is evident in his affiliations with prestigious organizations like the American Legion, Central Florida Christian Chamber of Commerce, and the Orange County Bar Association, among others. He’s a committed advocate, driven by a passion to deliver results and justice for his clients.

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