Compare LLC to Corporation?

Compare LLC to Corporation?

 

The primary differences between a Corporation and an LLC is ownership structure and taxation.

As a legal entity that’s separate from its owners, corporations can make a profit, be taxed, and can be held legally liable. Corporate ownership is determined by shares issued to individual “share-holders” where each share represents a “unit” of ownership in that entity. The value of each “unit”, or share, is determined by several factors, including the number of shares issued. The organizational structure of a corporation can vary, but the typical organizational structure consists of a board of directors, officers, employees, and shareholders.

With a corporation, profits are taxed first at the corporate level and again when dividends are paid to shareholders on their personal tax returns. In some instances, however, a business owner may not want profits (or losses) to be reflected on their personal income tax return. Perhaps an owner has personal financial liabilities or legal issues that would make regular distributions undesirable. The C-Corporation can provide for greater separation of the business profit and loss from an owners annual reported personal income without affecting his or her equity in the business.

The LLC is not actually a corporation, but is rather a business organization that can be comprised of one or more owners. With the LLC (Limited Liability Company) owners are called “Members” and can own a specified percentage (%) of the business rather than holding shares in the company.

LLCs do offer more flexibility in the way they are managed and usually have fewer recordkeeping and reporting obligations than corporations. LLC business owners have the option of taxing the LLC like a sole proprietorship, a partnership or a corporation by filing the appropriate forms with the IRS. Generally, the LLC’s business income is treated like personal income because the IRS automatically classifies the LLC as either a sole proprietorship or a partnership depending on how many members are involved. The organizational structure of an LLC is more streamlined and informal than that of a corporation, however, an LLC is required to have at least one registered manager (or Managing Member).

The LLC also has flexibility with respect to taxation. An LLC that elects to be taxed as a corporation can pay its members a salary that work in the business as they are considered employees. This means having to withhold income tax and pay a part of payroll taxes such as social security and Medicare.