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What is the Difference Between a Corporation and an LLC?

Have you been considering starting a business and are wondering whether to start an LLC or a corporation? In this article, we will explain everything you need to know and the difference between the two to make your decision as easy as possible.

What is an LLC?

An LLC or limited liability company is owned by one or multiple individuals or groups called members. Unlike shareholders, LLC members are not distinct from the corporation. The LLC itself is not responsible for paying taxes. Instead, the profits of the LLC are subject to pass-through taxation, which is paid by its members on their personal income tax returns. While LLC members have the option to adopt alternative management structures, they have the ability to operate the company.

What is a C Corporation?

A corporation, also known as a c-corporation, is a type of business structure that operates independently of its shareholders. The corporation pays its own taxes, can own property or enter into contracts as a separate entity from its owners, and is liable for debts or wrongdoing. Shareholders become owners when they purchase stock in the corporation. They have a very limited role in the corporation’s management and pay taxes only on the profits distributed by the corporation.

What is a S Corporation?

An S-corporation merges characteristics of c-corporations and LLCs. Similar to C-corporations, an S-corporation functions as a separate legal entity that is responsible for limited liability concerning the company’s debts and other obligations. However, shareholders in an S-corporation are required to pay taxes on the business’s income, in the same way as members of an LLC.

4 Differences between a Corporation and an LLC

Formation:

One or more business owners establish a limited liability company. The individuals submit Articles of Organization to the state. Next, the members produce an Operating Agreement to manage daily activities and define the ownership percentage of each member.

To create a corporation, one must file corporate organization forms (for example, Articles of Incorporation or related papers) with the state in which the enterprise will operate. Additionally, the corporation establishes a Board of Directors to oversee corporate matters, and the board approves bylaws (operational documents).

Ownership:

An LLC’s ownership, as well as other details such as the percentage of the company owned by each member and the corporation’s approach to admitting or removing members, is defined in the operating agreement. If an operating agreement does not exist, the LLC must follow state law. If a member of the LLC departs, some states require that the LLC be dissolved; the remaining owners may then choose to create a new LLC.

Differing from an LLC, the proprietors of a corporation are referred to as “shareholders,” and their ownership stake is proportionate to the number of shares of the company’s stock they possess. A business can readily authorize additional shares, and shareholders can effortlessly transfer their shares to another individual.

Taxes:

Corporations are required to file separate tax returns and pay corporate taxes. Shareholders will be responsible for paying and reporting income taxes on any dividends received from the company, just as they would on any business income.

However, the IRS does not differentiate limited liability companies (LLCs) for tax purposes. LLCs that possess a single member are automatically taxed as sole proprietorships, while those with two or more members are taxed as partnerships. Regardless of the structure, shareholders receive a fraction of the corporation’s profits and must report and pay taxes on those earnings as if they were self-employed.

Management:

An LLC’s management can be structured in a variety of ways. Any member of the LLC can act as a manager, and they can choose to work as a management team. The line between owners and managers in an LLC can be blurred. One advantage of the LLC structure is that it may appear to some business owners to be less strict in terms of company management while still providing liability protection.

Compared to an LLC, the management structure of a corporation is considerably more formal. The shareholders of a corporation have the expectation that management will consist of a defined Board of Directors. Day-to-day operations are overseen by the corporation’s officers. While shareholders are the legal proprietors of the corporation, they do not have any influence over the company’s daily administration or policies.

Bottom Line:

In conclusion, both LLCs and corporations offer unique advantages and disadvantages to businesses. LLCs provide greater flexibility and simplicity in management and taxation, and members are shielded from personal liability. Corporations, on the other hand, provide more formal management structures and offer easier access to funding and potential for growth. Ultimately, the choice between an LLC and a corporation will depend on the specific needs and goals of the business. Careful consideration of the advantages and disadvantages of each entity is crucial before making a decision. It is important to consult with legal and financial professionals to make an informed decision that will set the business up for success in the long run.

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Written by Tessa Braybrook

Tessa joined Superior Trucking Payroll Service in September 2022. She loves to write and make videos which made her a great asset to the team in her marketing position. 

Before working at Superior Trucking Payroll Service she worked in IT at GVSU which gave her the skills to problem-solve with customers over the phone. 

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