When you start a business, you’ll need to choose its legal structure. Two popular options are corporations and limited liability companies (LLCs). Both structures protect business owners from personal liability, but they operate differently in several key areas. Understanding these differences can help you choose the right structure for your business.
Ownership structure
A corporation has shareholders who own shares of stock. These shareholders can be individuals or other entities, and their ownership is represented by the shares they hold. Share ownership determines control and decision-making power within the corporation. In contrast, an LLC has members who own the business. Members can be individuals or other companies. LLCs don’t issue shares like corporations. Instead, members hold membership interests in the business.
Taxation
Corporations typically face taxation as separate entities. This means the corporation itself must pay taxes on its profits, and then shareholders pay taxes on any dividends they receive, leading to potential double taxation. However, if the corporation elects to become an S-corporation, it can avoid double taxation by allowing profits and losses to pass through to shareholders’ personal tax returns. LLCs generally enjoy pass-through taxation. This means that the business doesn’t pay taxes itself; instead, the profits and losses pass through to the members, who report them on their personal tax returns.
Management structure
Corporations follow a formal management structure with a board of directors overseeing the company’s operations and officers managing day-to-day activities. LLCs, on the other hand, have more flexibility. They can be member-managed, where the owners manage the business, or manager-managed, where the owners appoint a manager to handle operations.
Formalities and compliance
Corporations face more regulatory requirements than LLCs. They must hold annual meetings, maintain detailed records, and follow corporate formalities, such as issuing stock certificates and keeping meeting minutes. LLCs are less formal and have fewer compliance requirements. For instance, they don’t need to hold annual meetings or record minutes, which makes them easier to manage.
Both a corporation and an LLC offer personal liability protection and support business growth. Your choice depends on your specific needs, such as the level of formality you prefer and your tax situation.