LLC vs. Corporation: The Key Differences You Should Know

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LLC vs. Corporation—wondering which one is better?

Then you’re at the right place. LLCs and Corporations are both extremely popular business structures among entrepreneurs. 

They also have quite a few similarities, which can make it difficult for you to choose between them.

Also, the total number of new business applications in the United States has more than doubled in the past decade to over 450K

On the other hand, the number of new Corporation applications has reduced to about 54K/month.

Then why are the number of business applications for Corporations reducing? How is an LLC different from a Corporation?

Let’s find out.

LLC vs. Corporation: How Are They Similar?

The only similarity that LLCs and Corporations have is that of limited liability.

This means that the owners and investors would be shielded from all the debt and lawsuits against the business.

Typically, this liability is limited to the extent of that particular person’s investment in the business.

However, to maintain this protection, the businesses must keep their operations separate from those of their owners and investors.

LLC vs. Corporation: How Are They Different?

A limited liability company (LLC) is very different from a Corporation. 

Let’s take a look at the differences between them.

1. Business Formation Process

The formation process for an LLC is easier as compared to that of a Corporation. You must register your business in every state where you’re operating. Here’s how the process is different for both these business structures.

LLC

To form an LLC, you have to file your Articles of Organization with the Secretary of State. Post that, you’re required to draft an Operating Agreement. This agreement would talk about the roles and responsibilities of the LLC’s members (owners). 

Finally, you’ll need to pay a registration fee. You could leverage the services of a reputable firm like GovDocFiling for accomplishing all of the above with ease. 

Corporation

For forming a Corporation, you’re required to file your Articles of InCorporation with the Secretary of State. These are also called Certificate of InCorporation or Corporate Charter in certain states. You also need to form a Board of Directors and create corporate bylaws for the business. 

2. Taxation

The way your business is taxed also depends on whether it’s an LLC or a Corporation. Here’s how each of these company structures is taxed:

LLC

An LLC can choose to get taxed as a Partnership, Sole Proprietorship, S-Corporation, or even a C-Corporation.

Corporations

Corporations, on the other hand, can get taxed as either C-Corporations or S-Corporations. 

How does the taxation for each of these work?

  • S-Corporations pass the profits to shareholders’ personal tax returns through the pass-through taxation feature. This means that the shareholders are only taxed on the profit and are saved from double taxation. For an LLC or Corporation to get taxed as an S-Corporation, it must have fewer than 100 shareholders who can’t be Corporations, Partnerships, or non-residents.
  • C-Corporations are required to pay corporate taxes on the profits that they make. Additionally, the income that’s passed through to the shareholders in the form of dividends is also taxed. 
  • Sole proprietorships and Partnerships offer the pass-through taxation feature as well. However, this would be a costly affair if you’re earning huge profits. This is because the owners here would be considered self-employed. As a result, you’d have to pay hefty Social Security and Medicare taxes.

3. Ownership

When it comes to the ownership of LLC vs. Corporation, there are some major differences. Let’s take a look at them.

LLC

LLCs are more restrictive when it comes to ownership. The members each own a specific percentage of the business that’s called the “membership interest.” However, this ownership doesn’t need to be in equal terms; you can share the ownership as you wish.

Also, transferring your membership from an LLC is not very simple. You have to get the approval of other members. 

Corporation

The ownership of a Corporation is based on the number of shares owned by a shareholder. The Corporation issues shares as a proportion of the percentage of ownership. For instance, if you own 50% of a Corporation that has 100 shares, you’d receive 50 shares.

The best part about shares is that they’re easily transferable. Also, Corporations have a perpetual life. This means that it won’t get affected if you sell shares, transfer them, or even die.

It’s also easy to give shares to your employees and go public if you’re a Corporation.

4. Managing the Business

The requirements of an LLC and a Corporation are dramatically different. Let’s take a look at them. 

LLC

The members of an LLC manage it and they don’t have a rigid structure like Corporations. Instead, they function more like a traditional business where the members may not even have formal business titles. 

Additionally, they don’t have very strict requirements when it comes to recordkeeping. Most states don’t require LLCs to have annual reports.

Corporation

A Corporation has a solid management structure with the board of directors deciding the direction in which they want to take the business. 

On the other hand, the officers are the ones who dictate the day-to-day running of the business. Corporations are also required to hold annual shareholder meetings and generate annual reports. They have stringent recordkeeping requirements as well.

Final Thoughts

An LLC and a Corporation are dramatically different from each other. While both of them offer limited liability for their owners, that’s where the similarities end. 

The business formation process is quite long for a Corporation when compared to an LLC. Similarly, Corporations have fewer options for taxation. They also have stringent norms for managing the business. 

Finally, LLCs have a more fluid ownership structure as compared to Corporations where the shares are divided based on the percentage of ownership. 

Ready to make a choice between an LLC and a Corporation? Compare the pros and cons to make the final decision.

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