LLCs vs. Corporations

Both corporations and LLCs are separate legal entities that are created by a state filing.

Both corporations and LLCs offer the same limited liability protection - the owners are typically not personally responsible for the debts and liabilities of the business. However, if a corporation is not run properly (annual meetings are not held, stock is never issued, and/or other formalities required by the State of Incorporation are not met), the IRS may hold shareholders personally liable for corporate debts. At the same time, if an LLC member has personally guaranteed the obligations of the LLC, that member can be held personally liable. An LLC member can also be held liable if it is determined that the LLC is merely an alter ego of the member(s).

The ownership, which is stock with corporations or membership interest with LLCs, can be divided into numerous classes.

The LLC is a pass-through tax entity. This means that the income or loss generated by the business is reflected on the personal income tax return of the owners. A C corporation is a separately taxable entity. The profits and loses are taxed directly to the corporation. This can lead to double taxation on dividends that are paid out of corporate profits to the owners.

The shareholders of Corporations are generally required to be US residents, whereas generally non-residents can become members of LLCs.

A corporation requires that certain formalities be followed. The corporation must hold annual meetings of shareholders and directors each year, and meeting minutes must be kept with the corporation’s records. LLCs are not required to hold such meetings; however, it is a good idea to document major decisions of the company and hold regular meetings of members.

Transferring stock in a corporation it typically easier than the transfer of ownership with an LLC. Typically, a shareholder of a corporation is not required to get approval of the other shareholders before selling stock. Whereas with an LLC, the usual rule is that the owners must obtain approval of the other owners before ownership can be sold.

The management of an LLC can be by members, in which case the management is much like that of a partnership. If the management of an LLC is by managers, then the management structure closely resembles a corporation.