Opening a new business is a serious decision for any beginner entrepreneur. Yet, even before you dig into all legal formalities and routines, you need first to define your business structure, which is an even bigger decision to make since it will lay a foundation for your business’s day-to-day operation and development afterward. Most likely than not, your choice will be between starting an LLC or corporation which are the most popular business types for now. Each of these entities has its benefits and is a more optimal choice for certain business scenarios. As a newcomer, you might not pinpoint those advantages at a glance, and we are here to help. In our detailed guide, we’ll take a close look at LLC vs corporation similarities and differences and which of these structures is a better choice for your individual business needs.
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A corporation is a type of business entity usually established by a group of members sharing the same business goals and owning business shares pro-rata to the contributions. In the eyes of the law, corporations have rights similar to those of persons, hence they are often called legal persons. As such, they are entitled to sign contracts, file sues, own property, and take loans. The process of forming a corporation is called incorporation. Once you incorporate a business, you’ll enjoy liability protections separating your personal liabilities from those of a company. In other words, your individual assets will be securely shielded against any financial obligations related to company damages, losses, and violations.
By type, corporations fall into C-corps, S-corps, and Non-profit corporations mainly distinguished by taxation methods. Thus, C-corporations are taxed at both corporate and individual levels which means owners are taxed as physical persons while the company is also taxed as a business entity. In contrast, S-corporations pass company profits and losses to the personal tax returns of their owners avoiding double taxation. Yet, the S-Corp membership is limited to 100 persons. As the name suggests, non-profit corporations generate no profit for their owners and are exempt from taxes. Any funds received by the company are used solely for business purposes.
A limited liability company or an LLC is the US-specific business entity structure that hits a sweet spot between a sole proprietorship and corporation by combining a more simple management structure with the personal assets protection characteristic of corporations. In a word, it’s a sort of hybrid that brings the best of both worlds. Owned by a single or several LLC members, this business entity is fairly easy to establish. The LLC formation process is quick and straightforward, and for taxation purposes, LLCs are treated as pass-through entities paying no taxes at a business level.
There are several features LLCs and corporations have in common and a whole lot of characteristics that draw a clear differentiation line between these two business structures. To give you a clue, we’ll consider all those aspects in detail.
Limited liability or personal asset protection is the biggest benefit and obvious common feature for these two business types. Running an LLC or a corporation, you’ll have no personal commitments on company debts, losses, or other financial liabilities with your own property. Even if the company goes bankrupt for some reason, you can rest assured your personal savings and property will remain legally protected against business liabilities. Likewise, you’ll be free from any obligations pursuant to sues your company might be involved in. Solid individual asset protection is a big plus that serves as a strong incentive for entrepreneurs to legalize their business and operate it in a secure manner.
Before incorporating or filing an LLC, you need to choose a name for your company and register it with the state. This name should be unique,and you’ll reserve it for your company alone ensuring no other entity will ever use it. Needless to say how important it is to have a recognizable, memorable, and exclusive business name for creating a brand, developing company corporate style, and maintaining the company reputation on the market overall.
Seemingly very alike, LLCs and corporations are not similar. To make a final decision, it’s essential to understand the peculiarities that set these two business structures apart. So, let’s figure out the core differences you need to know.
Right off the bat, get ready to pay more for setting up a corporation. Associated fees are noticeably higher and the whole formation process is more complicated. While LLC registration is fairly simple and relatively quick engaging only filing basic documents and appointing a registered agent, the incorporation process involves not only state filings and registering Articles of Incorporation but also quite a number of preparation steps such as working out the company bylaws, holding the board of directors meeting, and issuing shares.
Simplicity is the name of the game for LLCs and the same is true here. LLC owners divide the business profits between themselves as they deem necessary and can function as company managers or delegate the company management to hired persons.
For corporations, though, it’s not that simple. This form of business has very strict ownership and managerial structure. To become the company owner, a member needs to buy a company share and will be enabled to get the profit proportional to the contribution. The company management is split between the board of directors at the higher level and an operating board in day-to-day activities.
For corporations, there is strict differentiation in taxation for two types of corporations liable for taxes. The oldest and most widely used type of corporate business is a C-Corporation. Easier to set up and exposed to fewer state regulations, at the same time, C-Corps are exposed to so-called double taxation when the company profits are taxed at both business and personal level. In contrast, S-Corporations transfer their profits to the personal tax returns of their owners, thus, avoiding paying taxes on dividends. However, take note that S-Corps have certain limitations at the business level entitled to have no more than 100 members, eligible for a single stock class, and not authorized to have foreigners or legal entities as the company stakeholders.
When it comes to LLCs, similar to partnerships, they are taxed as pass-through entities by default filing no business tax returns. Yet, one of the biggest LLC benefits here is the ultimate flexibility. This business structure allows choosing to be taxed either as a partnership or as a corporation. What’s more, you can swap for a different taxation method at any time by applying registration amendments to the IRS.
Taking into account all pros and cons and differences between these business structures, a corporation is an optimal form for bigger companies or those that have rapid growth in their business plans. Besides, providing closer control over the business, corporations are more attractive for foreign investors and investments overall, not to mention that corporation state laws don’t change by state, which is yet another selling point if you think about expanding your business in the future.
A relatively new business structure created to maintain small-to-midsize businesses, an LLC is a great choice for startupers and business newcomers as well as for small-scale businesses operating at a certain state. It offers flexibility at all stages and makes it easy to legally run your business.
Once you make up your mind about the best business structure for your future company, you might seek some help in business formation. And this is where LLC services come into play. To pick the one that will meet all your demands without searching high and low, we suggest setting your eyes on ZenBusiness or LegalZoom, both being reputed industry top-liners.
