Understanding LLCs and Corporations: A Comprehensive Overview

By: Mengxin Esther Cui

When you finally make the decision to turn your idea into a real business, one of the most important questions is: what type of entity best fits your needs? Types of business include sole proprietorship, partnership, limited partnership, limited liability partnership, nonprofit organization, and s corporation. Among these types of businesses, Limited Liability Companies (LLCs) and Corporations are two common options that offer distinct advantages and differences; including structure, formalities, taxation, ownership, and investors and how they help shield personal liability.

Limited Liability Companies

A Limited Liability Company (LLC) is a flexible business structure and a popular choice for a wide range of business across various industries. The owners of an LLC are called members, and they enjoy limited liability protection, meaning their personal assets are generally shielded from business liabilities. Businesses that choose to operate as LLCs are usually, small or medium-sized businesses, real estate ventures, creative and freelance businesses, family-owned business and startups and technology companies.

Corporations

Corporations are separate legal entities owned by shareholders. They offer limited liability protection, and shareholders' personal assets are typically protected from the debts and liabilities of the corporation. Corporations have a more formal structure, including shareholders, directors, and officers. Instead of member units in LLC, the ownership of the corporation is represented by the stocks/shares. Businesses that operate as corporations are normally high-growth startups, publicly traded companies, business seeking international expansion, franchise business, research and development companies.  

Differences between LLCs and Corporations

1. Structure and Formalities: LLCs have fewer formal requirements compared to Corporations. LLCs can be managed by members or designated managers, while Corporations have a board of directors responsible for decision-making, hiring top executives in the company, and strategic guidance.
2. Taxation: LLCs have flexibility in how they are taxed. By default, LLCs are treated as "pass-through" entities, where profits and losses pass through to the members' personal tax returns. Corporations, on the other hand, face "double taxation" as they are taxed at the corporate level on profits and shareholders are taxed on dividends received.
3. Ownership and Investors: LLCs allow for a more flexible ownership structure, permitting various classes of membership interests and a diverse range of investors. Corporations issue shares of stock, which can be publicly traded or privately held, allowing for easier fundraising, and attracting investment.

Personal Liabilities

In terms of personal liabilities, both LLCs and Corporations offer limited liability protection to their owners. This means that in most cases, personal assets are shielded from business debts and legal obligations. However, it's crucial to maintain corporate formalities, such as keeping business and personal finances separate, adhering to required record-keeping, and fulfilling ongoing filing obligations to maintain liability protection. It is always recommended that members or board of directors keep recording their meeting by having the minutes internally.

Conclusion

Choosing between an LLC and a Corporation depends on factors like the nature of the business, management preferences, tax considerations, and growth plans. LLCs offer flexibility, simplicity, and pass-through taxation, while Corporations provide a more formal structure, easier access to capital, and potential tax advantages. If you need more information about how to convert LLC into corporation, please feel free to connect at mengxin.cui@chugh.com.