What Is the Difference Between an LLC and a Corporation?

Sections of this topic

    When starting a new business, choosing an entity type is one of the most important decisions you must make. Many entrepreneurs are torn between a limited liability company (LLC) vs corporation. While these entities are similar in many ways, they have profound differences that should inform what you choose.

    What Is a Limited Liability Company?

    A limited liability company (LLC) is a type of business entity that protects its owners from personal liability. It is a hybrid business structure that blends the features of a partnership and corporation.

    The owners enjoy limited liability just like corporation owners and receive taxable dividends just like in a partnership. Some of the most notable limited liability companies include Johnson & Johnson, Nike, and PepsiCo inc.

    • No restriction in the number of owners and owners enjoy limited liability
    • Pass-through taxation and flexibility in taxation
    • Easy to operate plus flexible management options
    • Compared to other forms of business ownership such as a partnership or sole proprietorship, it’s costlier to form and maintain an LLC
    • Obtaining ownership interest might not be easy

    What Is a Corporation?

    A corporation is a business entity formed by one or more people with a shared goal. The most common types of corporations include S corporations, B corporations, C corporations, non-profit corporations, and closed corporations.

    Generally, corporations are legal entities distinct and separate from their owners. The entity can borrow money, enter contracts, hire employees, pay taxes, and even own assets with zero attachment to the stakeholders. The majority of large businesses, such as Toyota Motors and CocaCola Co., are corporations.

    • Stakeholders are not liable for corporate debts and legal obligations
    • Buying, selling, or transfer of ownership is straightforward
    • Easier access to capital through stock trading
    • Established power structure–Shareholders, chief executive officers, and directors have well-established responsibilities
    • S corporations are not subject to double taxation
    • Complex application process
    • Excessive bureaucracy, and rigid formalities
    • C-corps are subject to double taxation
    • It can be costly to form, run, and maintain a corporation

    LLC vs. Corporation: The Differences

    LLCs and corporations are alike in many ways. At the same time, they have major differences, especially in terms of formation, governance, ownership, and taxation. This comparison chart summarizes the key differences which we will discuss in detail.

    LLC

    S Corporation

    C Corporation

    Limited liability

    Yes

    Yes

    Yes

    Flexible Management Style

    Yes

    No

    No

    Eligibility Restrictions

    No

    Yes

    No

    Limitless Shareholders

    Yes

    No

    Yes

    Capital Structure Restrictions

    No

    Yes

    No

    Single Taxation

    Yes

    Yes

    No

    Double taxation

    No

    No

    Yes

    Entity can go Public

    No

    Yes

    Yes

    Annual Reports

    Not Required

    Yes

    Yes

    Annual Shareholder Meeting

    Not Required

    Yes

    Yes

    Can Raise Funds From Investors

    Yes

    Yes

    Yes

    Directors are Public Record

    No

    Yes

    Yes

    Formation

    There are strict formal requirements that must be fulfilled when forming both LLCs and corporations. Both entities must fulfill state maintenance and reporting requirements to ensure limited liability protection. However, corporations have more annual obligations. For example, they must hold annual shareholder meetings.

    Moreover, corporations must file annual reports to keep the secretary of state updated about any changes or actions enacted through votes by the board of directors. LLCs don’t have strict record-keeping requirements, and some states, such as Ohio, don’t make it mandatory for such entities to file yearly reports with the secretary of state.   

    Ownership

    To own a corporation, you have to buy a share or a percentage of the business stock. Shareholders are entitled to dividends and are not actively required to take part in running the business. Also, they can sell and buy shares as they wish.

    On the other hand, LLCs are owned by members who set the rules pertaining to the requirements for membership and transfer of ownership interest. Depending on the set operating agreement, all members could receive equal profits and losses regardless of their financial contribution to the business. Again, all members own the business and participate in its everyday operations.

    Transfer of Ownership

    With corporations, ownership is wholly based on the shares owned. If a shareholder wants a stake in the company, they simply need to sell or transfer their stock to a willing buyer. 

    LLCs do not enjoy the same freedom. A member must draft a sales agreement with a new buyer and might have to record the sale with the state’s Business Registrations Agency. While there are no significant restrictions, a transfer process can be laborious and time-consuming.

    Governance and Management Structure

    All members in an LLC own the business and participate in its everyday operations. There’s no power hierarchy, and members can play specific management roles or appoint others to run the business. Generally, LLCs are member-managed, and the management structure is less formal.

    On the other hand, corporations have a rigid governance structure with the board of directors at the top of the power hierarchy. Shareholders are at the bottom of the power chain. While they have a right to vote for the board of directors and officers, they do not make any business decisions unless they are pre-approved.

    Tax Implications

    LLCs and corporations are poles apart regarding their tax obligations. LLCs are usually taxed as pass-through entities unless the members choose to have them treated as C corporations. Pass-through entities or S corporations allow owners to pay personal income tax once they receive profits without subjecting them to corporate tax.

    C corporations are not immune to double taxation. This means that the business pays taxes as an entity, and owners pay personal income tax after receiving income.

    LLC vs. Corporation: What Are the Similarities?

    Both of these entities provide personal assets protection for owners and require registration through a state-accredited business filing agency. Also, both entities enjoy perpetual existence even if a shareholder or owner passes on or resigns.

    Perpetual Existence

    LLCs with two or more members and corporate entities are not at threat of extinction if a member or stakeholder can no longer hold their position. As long as the business owners do not file Articles of Dissolution or set a dissolution date in the formation documents, the entity will continue to run indefinitely.

    Business Registration

    As expected, you must file formation paperwork with a state-accredited filing agency. It is also mandatory to obtain licenses and permits before kickstarting operations. Read about the steps involved in registering a business here.

    Limited Liability Protection

    Both LLCs and Corporations provide asset protection for owners. This means that they are not personally liable for liabilities and debts incurred by the business. However, in some cases, limited liability protection may not prevail, for instance, when an owner personally guarantees a debt or commits a crime.

    Frequently Asked Questions (FAQs) for LLC vs Corporation

    Are you still torn between forming an LLC and Corporation? Here are the answers to some frequently asked questions. Hopefully, they will shed more light on the topic and help you make an informed decision.

    Bottom Line on LLC vs Corporation

    So, what should you go for between an LLC and a corporation? The right answer will depend on the financial, operational, and legal implications you are ready to bear. Think of the business entity as the foundation of your venture that will set the rules you must follow. Because an ounce of prevention is worth a pound of cure, it is perfectly rational to consult a business lawyer before making your final choice.