What’s The Difference Between LLCs and Corporations?

Choosing the right structure for your business is a critical decision that can have far-reaching implications for its operation, tax liability, and legal obligations. With our experience in business law, Gertz & Rosen, Ltd. can provide invaluable guidance in making this important choice. We can help you understand the key differences between Limited Liability Companies (LLCs) and corporations. For guidance specific to your case, call us to schedule a consultation.

Operation

Firstly, it’s crucial to understand how LLCs and corporations operate. Both require specific documentation filed with the state of operation, and each state has unique regulations and requirements for filing. Protection from personal liability is a shared feature.

However, corporations necessitate more reporting and recordkeeping with a standardized operating structure. On the other hand, LLCs offer flexibility, allowing owners to mold the operation according to their preferences.

Ownership

Ownership in these entities is differently structured. In an LLC, owners are called members, owning a percentage of the business. They can be individuals, corporations, or even entities from foreign countries. The members and their ownership percentages are outlined in the operating agreement. However, some states may require LLCs to dissolve if a member departs and there is no formal succession plan in place.

In contrast, corporation owners are shareholders who own company stock equating to their ownership percentage. The transfer of shares is much simpler, allowing shareholders to easily change or relinquish ownership.

Legal Liability

Both LLCs and corporations protect owners from personal liability against business lawsuits or debts. However, owners and shareholders can still be held liable for negligence. Therefore, maintaining good record-keeping, separating personal and business finances, and having adequate insurance are essential to mitigate potential legal issues.

Tax Liability

When tax time rolls around, LLCs offer more options than corporations. An LLC is not tied to a specific tax classification, meaning it could be taxed as a sole proprietorship, partnership, C corporation, or S-corp. Single-member LLCs are taxed as sole proprietorships, while multi-member LLCs are taxed as partnerships.

Corporations, however, pay corporate taxes on profits and file corporate tax returns. Shareholders must also report and pay personal income tax on their share of the profits. To avoid double taxation, corporations can opt to be taxed as an S corp instead of a C corporation, but this requires meeting additional requirements.

Which Is Right for My Business?

Choosing between an LLC and a corporation depends largely on your business type, finances, and long-term goals. In general, if you aim to attract outside investors or scale your business, a corporation might suit you better. However, if you’re a sole proprietor not planning to scale, an LLC might be preferable.

Nevertheless, it’s crucial to consult with a business law attorney to navigate these complexities. Gertz & Rosen, Ltd., is here to guide you through this process, ensuring that you make the best choice for your business. Contact us today to discuss your case.