Key Differences Between an LLC and a Corporation

When starting a business, it is important to consider the pros and cons of each entity type to determine which one is best suited to accomplish your goals and objectives. Most businesses are organized as a limited liability company (an “LLC”), however, others are structured as a corporation, or as a partnership. There are many positive attributes of each of entity type – in fact, too many to discuss! The objective of this article is to provide a surface-level overview of the similarities and differences of the LLC and corporate entity types. Both an LLC and a corporation offer an owner personal liability protection – generally, a creditor has no personal recourse against an owner for a debt or an obligation of the entity unless the owner was a guarantor of such debt or obligation. Though there are many similarities between these two entity types, some of the key differences are discussed below:

Ownership

An LLC is owned by its “members” and seldom has any restrictions regarding eligibility to become an owner. It issues to its members a “membership interest” or a “unit” to denote ownership in the entity and may have different classes of membership interests for profit sharing, voting, management, and other rights. An LLC provides “distributions” to its members of any profits earned by the company.

Conversely, the owners of a corporation are known as “shareholders” and each owns shares of common or preferred stock of the corporation. Similar to an LLC, a corporation can have different classes of shares for profit sharing, voting, management, and other rights. A corporation distributes profits to its shareholders in the form of a dividend which is based on a shareholder’s percentage of ownership. Unlike dividends, an LLC distribution which may be based on a member’s percentage of ownership or other arrangement agreed upon by the members.

Management

An LLC is either managed by its members which is known as “member-managed,” or by a manager which is known as “manager-managed.”

Under Florida law, a corporation is required to satisfy certain statutory formalities and have a structured management. For instance, each corporation must have a board of directors and elected officers unless a shareholders agreement abolishes it. Furthermore, a corporation is required to have an annual meeting in addition to complying with certain reporting requirements.

Tax Considerations

Generally, an LLC is regarded as a “pass-through” entity. Thus, profits and losses of an LLC are neither paid nor incurred at the entity-level but instead at the owner-level and is reported on each member’s personal tax return. A single member LLC is known as a “disregarded entity “ for federal tax purposes (unless an election is made by the member to be taxed as a corporation) and its business profits and losses are reported on Schedule C of the owner’s personal tax return. With regard to a multi-member LLC, each owner reports their respective profits and losses from Form K-1 on Schedule E of their personal tax return. In addition, under the “check the box” election, a multi-member LLC can elect to be taxed as a corporation instead of its default partnership tax status, and similarly, a single-member LLC can elect to be taxed as a corporation instead of its disregarded entity status.

Unlike an LLC, a corporation is a separate taxable entity from its owners and is required to file a corporate tax return and pay taxes. In addition, a shareholder must pay taxes on any dividends received from the corporation which, in addition to the corporate level tax, is the concept known as “double taxation.” In certain instances, all shareholders can make an election for a corporation to be taxed as an S corporation to avoid double taxation. Similar to an LLC, an S corporation does not pay corporate income tax but has certain restrictions and shareholder eligibility requirements.

The differences between an LLC and a corporation can be overwhelming when trying to decide which entity is best suited to accomplish your business goals and objectives, and this article barely touched the surface on the differences between the two. At Aventus Law Group, our expert tax and business attorneys can help advise you on entity selection and structuring to address your business needs.

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