How to Incorporate: Form an LLC vs Form a Corporation
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Do you want to form an LLC or form a corporation?
When entrepreneurs consider how to incorporate when starting a business,, or when existing small business owners consider changing their business structure, they are often evaluating between the limited liability company (LLC) and the C corporation as the entity type for their business.
While LLCs and C corporations have some similarities, most notably limited liability protection for owners, they also have a number of distinct differences. If you are one of the business owners considering forming an LLC or corporation, this article will help you compare LLCs and C corporations a little more closely.
Similarities
- Forming an LLC or C corporation offers the same limited liability protection for owners, meaning that the owners are typically not personally responsible for the debts and liabilities of the business.
- Both are separate legal entities created by a state filing.
- Both have very few ownership restrictions. The owners are not required to be US residents, and the number of owners is without limitation. Additionally, owners are not required to be individuals (as with S corporations).
- Ownership (stock with corporations and membership interest with LLCs) can be divided into numerous classes.
The Differences
1. Taxation
- C corporations are separately taxable entities. C corporations file a corporate tax return reporting profits or losses, and any profits are taxed at the corporate level. C corporations face the possibility of double taxation when profits are distributed to shareholders in the form of dividends, as the shareholders must report dividends as personal income and pay tax on them at the individual level.
- LLCs are typically pass-through tax entities. While LLCs do complete a business tax return, the profit or loss of the business is passed-through to the owners’ personal tax returns, where it is reported and any necessary tax paid at the individual level.
2. Ongoing Formalities
- C corporations face more extensive internal formalities, including adopting bylaws, issuing stock, holding initial and then annual meetings of directors and shareholders, and keeping the minutes of these meetings with the corporate records.
- While LLCs are not subject to the same internal formalities, they are encouraged to adopt an operating agreement, issue membership shares, hold and document annual meetings of the managers and/or members, and properly document all major decisions of the company.
3. Transferability of Interest
- A shareholder of a C corporation typically is not required to get approval from the other shareholders before selling stock.
- A member of an LLC typically must receive the approval of the other members before ownership can be sold.
4. Management
- 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 more closely resembles that of a corporation, since the members will not be involved in the daily business decisions of the company.
- C corporations have directors and officers. The board of directors oversees and directs the affairs of the corporation and has responsibility for major decisions, but is not responsible for the day-to-day operations of the corporation. The directors elect officers to manage the daily affairs of the business.
5. A C corporation’s existence is perpetual. Conversely, an LLC typically has a limited life span. Most states require that LLCs list a dissolution date in the formation documents (typically called the articles of organization or a certificate of organization), and certain events, such as death or withdrawal of a member, can cause the LLC to dissolve.
As you determine which business structure is the best for your business, there are both online and professional resources to assist you when you form an LLC or corporation. BizFilings’ Incorporation Assistant can help you compare different entities based on a number of considerations that are important to you. For advice on which structure to choose, you should contact an attorney or accountant.
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