Structuring your business as an LLC vs corporation demand entirely unique approaches, and different types of businesses can benefit from structuring as an LLC vs corporation. Below, we’ll highlight the main differences between LLC vs corporation and talk about some reasons a business owner might choose either structure when building a business.
Note: There are other business structures (General and limited partnerships, LLPs, etc.) you might be considering, and we’ve created comparison guides for those, too! Check under Related Posts below to view some of those.
So, LLC vs corporation – which will it be?
LLC vs Corporation: Comparing Business Structures
A corporation is a legal entity and will be designated as either a C-corp or S-corp for tax purposes. An LLC is a legal entity that has more flexibility – owners can choose between operating as a sole proprietor, partnership, C-corp, or S-corp for tax purposes.
LLC vs Corporation: Taxes
A corporation must register as an S-corp or C-corp. An LLC has the flexibility to choose the tax structure that will best benefit its members, whether that’s as a sole proprietor, partnership, C-corp, or S-corp. Be careful when selecting your tax structure as an LLC, because corporation profits are taxed twice – the corporate tax and the individual tax. An S-corp won’t have to pay corporate taxes, but a business must meet stringent requirements to qualify as an S-corp. Many LLCs will find themselves forced to become C-corps instead of S-corps, meaning they will be required to pay the double tax on profits.
LLCs are, by default, treated as a single taxation entity (no corporate tax), but in the right circumstances, can qualify as an S-corp or C-corp.
LLC vs Corporation: Ownership
Business ownership varies between an LLC vs corporation. In a corporation, the owners of the business are the shareholders. The owners of an LLC are its members. Capital contribution is not a consideration of ownership in an LLC; members can distribute ownership stake to other members without regarding the amount of capital they’ve contributed.
C-corps (double taxation) can create a similar effect by creating a “unique stock class structure,” but that option is not available to S-corps (single taxation). S-corps must have a single class of stocks with capital-based dividends distributed to shareholders.
LLC vs Corporation: Operations
Business operations differ between LLCs and corporations. Any member of an LLC can act as a manager. LLCs can also choose to make no distinction between managers and owners of the business, choosing to share profits equally.
A corporation, on the other hand, must follow strict rules for business operations. A corporate structure, complete with a Board of Directors (management) and corporate officers (day to day) will operate the business. Shareholders of a corporation are technically considered the owners of the business, but are not allowed to be involved in the operations and management of the company.
Shareholders only have the power to elect directors, but they can also be elected as a director or made a corporate officer.
LLC vs Corporation: Making the decision
Your decision to structure as an LLC vs corporation may be compounded by your location. Because LLCs have only been around since the 1970s, they are considered a “new” legal entity and are treated differently according to the state they are created in. Some businesses might find that they can benefit from being a corporation in one state, but an LLC in another.