The company name approval is one of the difficult steps in the company registration process in...
While pondering on Company Formation in the US, one of the common dilemmas one faces is whether to opt for LLC or Corporation. Choosing the right business structure is pivotal to fulfilling business requirements. LLC and Corporation business structure offer distinct strengths and disadvantages to business owners and its members. Which suits you the best? Read this article till the end, we have made it easier for you to decide.
Under both these business entities, you will have to file business formation documents with the authority. Both these structures protect business owners from personal liability in case of financial loss to the company. Corporations generally have a more standardised as well as rigid operating structure. Further, they have more reporting and more recordkeeping requirements as compared to LLCs. On the other hand, LLC owners enjoy increased flexibility in running their business.
In terms of taxation aspect, LLC have more options than Corporations. LLCs can be taxed as sole proprietorships, partnerships, C corporations or S corporations. In case of Corporation, shares can be easily transferred which makes it attractive option for a business owner looking for outside investors.
At the time of forming an LLC, you first need to file a document called Article of Association with your state’s business filing agency. It contains some of the basic information about the LLC like the name of the LLC, address etc.
In order to form a corporation, articles of incorporation should be filed with the secretary of state’s office in the state where the corporation is being organised. In case where the secretary of state’s office accepts the articles of incorporation, it shall send the certificate of incorporation.
LLCs owners are termed as members. Each members owns a membership interest in the business. Membership interests in LLCs can be owned by individuals, corporations, other LLCs and foreign individuals.
The ownership of the LLC is laid down in the operating agreement of the business and without this agreement, LLC operates in accordance to the state law. On the other hand, corporation differs from an LLC. In corporation, owners are called shareholders whose ownership is reflected by the number of shares of the company stock they own.
The major point of distinction between LLC and Corporation is how they are taxed. In case of corporation, a corporate tax return needs to be filed and corporate taxes have to be paid. In case where the shareholders take distributions from the company, they will have to report such distributions on their personal tax returns and pay taxes on them.
On the other hand, LLCs do not have an IRS tax classification of their own. Single member LLCs are taxed automatically, just like a sole proprietorship and multi-member LLCs are taxed like partnerships. In both cases, company profits pass through to the members and the members pay income and self-employment taxes on their share.
As far as the liability of these business entities is concerned, both corporations are limited liability entities which mean that business owners won’t be personally liable in case of business debts or cases against the business. Both in case of corporation or LLC, must keep business and personal finances separate. Owners sign on documents and contracts on behalf of the company. In case of corporations, they are required to maintain additional documentation including corporate minutes, details on annual shareholder meetings, and information on its board of directors. Corporations should hold annual shareholders meeting every year. Further, any changes to be implemented will require a corporate resolution to be voted on at a meeting with board of directors.
A limited liability company is suitable for small businesses or manufacturing sector, whereas large businesses having their presence in multiple locations often tend to incorporate themselves into a corporation.
LLCs and corporations should fulfil compliance requirements in order to ensure smooth functioning. Both forms of business entities need to have a registered agent and update the details of such agent on file with the state. LLCs and Corporations need to file an annual report or franchise tax reports in order to maintain active status. LLCs have relatively lesser record keeping requirements than corporations. An LLC, unlike corporations doesn’t need to keep minutes, hold annual meetings or have board of directors. However, some states may mandate LLCs to file some documents while others may not.
For a quick understanding, refer to the table made below to understand the difference.
|Well suited for||Large entities||Smaller businesses|
|Management level||Shareholders, directors, officers etc.||Members of the company|
|Taxation||Double taxation||Single taxation|
|Ownership||Shareholders are owners||Members|
|Existence||Withdrawal, incapacity, or death of a shareholder doesn’t affect existence of the corporation.||Indefinite term|
|Legal entity||Separate legal entity||Separate legal entity|
|Shareholders meet-up||Meeting should be held periodically||Not mandatory|
|Paperwork requirements||Lot of paperwork required||Comparatively less paperwork requirements|
|Benefits||Can issue shares of stocks to lure investors; corporate income splitting can help in reducing total tax liability.||There is no upper limit on the number of owners; profit and loss are passed to the owners’ individual tax return; annual meeting or maintaining minute book is not necessary.|
|Disadvantages||Double taxation; High compliance requirements||It cannot engage in corporate income splitting to lower tax liability and also cannot issue stock.|
Both corporations, as well as LLCs, offers attractive benefits to its business owners. However, you need to decide based on which type of business structure aligns well with your goals.