LLCs and corporations give owners exactly the same liability protection.

Limited liability companies and corporations are both initially formed by filing legal paperwork with
the state. Let your business attorney help you prepare these documents. LLCs must file a “Charter,”
and corporations must file “Articles of Incorporation.”

HOW DO CORPORATIONS OPERATE?

A corporation is the most flexible and adaptable business structure. A corporation is chartered by the
state and has legal rights as if it were a person.

Corporations are extensively regulated, and a corporation’s activities are scrutinized carefully by the
tax authorities. A corporation appoints directors, conducts frequent meetings, and records the minutes
of those meetings. Corporate ownership is changed through the transfer or sale of stock.

HOW ARE LLCS DIFFERENT?

A limited liability company is similar in some ways to a corporation, but LLC owners do not have to
hold regular meetings.

Additionally, the paperwork requirements and the legal restrictions on limited liability companies are
significantly less burdensome and daunting than the requirements and restrictions for corporations.

WHAT IS THE FORMATION PROCESS FOR LLCS AND

CORPORATIONS?
All fifty states recognize corporations and LLCs. LLCs are formed when one or more owners (or
“members”) file a Charter. The members then prepare an “Operating Agreement” which spells out
each member’s percentage of the ownership.

On the other hand, corporations are formed (or “incorporated”) when the owners (“shareholders” or
“stockholders”) file Articles of Incorporation and select a Board of Directors to supervise the
business and establish its corporate by-laws.

Both corporations and LLCs have owners, but in a limited liability company, the “members” own the
assets of the business because of the investments they’ve made. In contrast, a corporation’s owners
own stock shares, but they do not own corporate assets.

WHAT ARE THE MOST IMPORTANT DIFFERENCES?

The biggest difference is that corporations have “shareholders” and LLCs have “members.”
Corporations tend to have many owners, while LLCs are now the most common small business entity
type.
An LLC has a liability shield like a corporation, but LLCs usually avoid the corporate tax rate, as an
LLC’s individual members are personally taxed on the earnings of the company, based on their
individual percentage of the earnings. “S” Corporations are taxed the same way as LLCs.

WHAT ARE “S” AND “C” CORPORATIONS?

All corporations begin as C corporations. A C corporation may be changed to an S corporation by
filing IRS Form 2553. C corporations and S corporations are taxed differently, so the main reason to
choose an S corporation is to reduce taxes.

C corporation profits are taxed and reported on the corporation’s federal tax return. Any after-tax
profits that are distributed to the shareholders as dividends are taxed again when those dividends are
reported by shareholders on their personal tax returns.

However, “double taxation” is avoidable by choosing S corporation status. S corporations are treated
like sole proprietorships and partnerships. Profits or losses pass through S corporations to
shareholders, so the only tax is the tax on what shareholders report on their personal tax returns.

Some states also pass profits and losses to an S corporation’s owners, but other states “double tax” S
corporations.

HOW ARE LOSSES AND PROFITS HANDLED?

Corporations and LLCs handle their losses and profits in different ways. A limited liability
company’s losses and profits “pass through” to the individual members, who pay income taxes – for
their percentage of the limited liability company’s profits – on their personal tax returns.
With a corporation, however, losses and profits remain with the corporation. The corporation – and
not the owners – pays taxes on profits and losses. Corporations retain their earnings, although some
earnings eventually and indirectly go to shareholders in the form of dividends.

HOW ARE CORPORATE AND LLC INCOME TAXES

HANDLED?
LLCs and corporations both pay taxes on their annual profits. Since 2018, the corporate tax rate in
the U.S. has been 21 percent. Corporate shareholders then pay personal income taxes on the
dividends they receive, so corporations are subject to what may be called double taxation.

Members of LLCs receive a percentage of the profits annually and pay the tax on their shares as part
of their personal income taxes. For instance, if a limited liability company with two members makes
$100,000 in profits in 2022, each will pay personal income taxes on $50,000.

LLC members are considered self-employed. They are required to pay for self-employment taxes
(including the Medicare and Social Security tax) on their portion of the LLC’s annual profits. A
corporation’s shareholders are not self-employed and do not pay a self-employment tax.

Choosing the right business entity—more specifically, an LLC versus a corporation—is an

important step in setting up your business, as it ensures you have the right structure to meet
your business size and needs. Whichever you choose, either will offer plenty of advantages
such as liability protection, a formal operating structure, and added credibility for your
newfound company.
LLCs and corporations (sometimes referred to as an inc.—short for incorporated) are
distinct classifications that offer their own strengths and weaknesses. So which one is best
suited for your needs? Let’s take a look at the basics to help you decide.
Differences Between LLCs and Corporations

Both these business types will require you to file business formation documents with the
state. Both protect company owners from personal liability for business obligations. In
general, corporations have a more standardized and rigid operating structure and more
reporting and recordkeeping requirements than LLCs. LLC owners have greater flexibility in
how they run their business.

Taxwise, LLCs have more options than corporations. LLCs aren’t tied to one particular tax
classification and can be taxed as sole proprietorships, partnerships, C corporations or S
corporations.
Shares in a corporation are far easier to transfer than ownership interests in an LLC. This
makes a corporation appealing for a business owner looking for outside investors.
Let’s take a closer look at the differences.
Ownership Structure

An LLC’s owners are called “members.” Each member owns a percentage, or “membership
interest” in the business. Individuals, corporations, other LLCs, and foreign individuals can
own membership interests in LLCs.

The ownership of an LLC is outlined in the business’ operating agreement—other details

include the percentage each member owns, how the business is run, and how the company
will deal with a new or departing member. Without an operating agreement, the LLC
operates according to state law. In some states, the LLC needs to be dissolved if a member
leaves, with the remaining owners forming a new LLC if they wish.

A corporation is different from an LLC in that corporate owners are known as

“shareholders” whose ownership percentages reflect the number of shares of company stock
they own. It’s relatively easy for a corporation to authorize additional shares, or for
shareholders to transfer their shares to someone else.

Management

LLCs can be managed by their members (owners), or they can be managed by one or more
managers, with the members acting more like passive investors. The people running an
LLC–whether members or managers– don’t have to adhere to traditional roles or titles like
CEO or Vice President, but can create a management structure that works for their business
needs.
In contrast, corporations operate with a much stricter management structure, with a board
of directors overseeing the business and officers who manage daily operations. Shareholders
must meet at least annually. Paperwork and record-keeping for shareholder and director
meetings is extremely important with corporations.
Taxes

There are two ways a corporation can be taxed. By default, corporations are C corporations.
They file a corporate tax return and pay corporate taxes. If the shareholders take
distributions from the company, they’ll report those distributions on their personal tax
returns (along with any company salary they receive) and pay personal income taxes on
them.

Some corporations can avoid this double taxation of distributions by electing to be taxed as
an S corp. S corps don’t pay corporate income tax. Instead, the company’s profits pass
through to the shareholders’ personal returns and each shareholder pays individual taxes on
their portion. To be eligible for S corp. taxation, a corporation must have 100 or fewer
shareholders and meet additional ownership requirements.

LLCs, on the other hand, don’t have an IRS tax classification of their own. Single-member
LLCs are automatically taxed like sole proprietorships and multi-member LLCs are
automatically taxed like partnerships. In either case, company profits pass through to the
members, and the members pay income and self-employment taxes on their share. But an
LLC can also elect to be taxed as a C corp. or–if it qualifies–an S corp.
Taxation is a complicated topic that may or may not influence whether you choose an LLC
vs a corporation. Always get advice from an experienced accountant about the best tax
classification and strategy for your business.

Legal Liability

Both corporations and LLCs are limited liability entities. This means the owners aren’t
personally liable for business debts or lawsuits against the business. Business owners do,
however, remain liable for their own negligence and for any obligations on which they’ve
signed a personal guarantee.

To maintain this liability protection, both corporations and LLCs should always keep
business and personal finances separate. Owners should sign documents and contracts on
behalf of the company, not in their own personal capacity. For corporations, additional
documentation needs to be maintained as well. This includes corporate minutes, details on
annual shareholder meetings, and information on its board of directors.
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