LLC vs. Corporation
LLCs, or limited liability companies, are seen as being extremely flexible entities that allow participants to reap the benefits of formal corporate architectures without sacrificing the advantages of traditional partnerships. Corporations, on the other hand, facilitate an advanced degree of separation between a business entity and its owners or shareholders. Although each classification has its fans and adherents, neither one is universally superior; creating a viable business is all about choosing an entity that fits your specific requirements.
Critical Differences in Income and Loss Handling
One of the major differences between LLCs and corporations is that an LLC is a pass-through entity. This means that any incomes or losses generated via normal operation pass directly to the firm's owners and investors.
In most corporations, with the exception of S corporations, incomes and losses are directed back to the business entity itself. While this does mean that owners don't directly retain the profits, it also means that they're not directly answerable for losses.
Flow-through entities enjoy some taxation benefits. For instance, some owners find it easier to avoid paying double taxes on their incomes by forming LLCs. Others register these entities to create flexible ownership structures; since all owners are individually taxed, it may be fiscally advantageous for the firm to split the total obligation. Corporations benefit from earnings taxes that are applied to the firm and distributed shareholder dividends; these systems may be more sustainable in some cases.
Indemnity and Liability
Although registering corporations is a more involved process, many business owners in high-risk fields feel that the advantages are well worth it. Corporate business owners who fall on hard times can disengage their personal finances from those of their firms and retain a heightened degree of flexibility when it comes to bankruptcy proceedings and debt resolution. Similarly, these individuals may gain advanced legal protection should their companies become the targets of litigation.
Structure and Formation
Many of the technical differences between forming an LLC and a corporation are reflective of the structural differences between the two classes of entity. Because LLCs don't have limitations on the number of members that own the firm, most can be created simply by providing articles of organization or a certificate of operation and an operating agreement along with the appropriate registration paperwork.
C and S corporations, which differ in terms of how they're taxed and how many shareholders they're allowed, need articles of incorporation, bylaws, stock ledgers, organizational shareholder and board resolutions and stock certificates. S-class entities may also require S corporation elections.
Running LLCs and Corporations
Finally, remember that pass-through status also impacts the way a firm operates. While a corporation can raise capital via various stock offerings, the usage of such funds must be decided upon by a legally recognized board of directors. Similarly, LLCs whose members can make direct contributions to the entity still have to come to agreements about which member or manager is designated to oversee normal operations and utilize resources.