Starting your own business is often one of the most liberating experiences that you can pursue. In fact, many entrepreneurs do so in order to capitalize on the freedom that it provides.
Before you move forward, though, it’s important to understand the difference between an LLC and a corporation. We’ve put together a simple guide that has everything you need to know.
Let’s take a look.
What Is an LLC?
The term LLC stands for ‘limited liability company.’ This refers to a type of legal protection that you have over your personal assets as a business owner.
To elaborate, your liability for your company’s financial obligation and debts can never exceed the amount of money that you have personally invested into your company. This means that another party could never force you to use a car, house, etc. to pay off a financial obligation or debt.
As you might expect, the absence of this protection could easily cause a business owner to lose everything during a lawsuit.
What Is a Corporation?
This term refers to a business entity that exists separately from its owners. Interestingly, corporations are able to take advantage of most of the rights that a human individual can.
This means a corporation can borrow money, file a lawsuit, pay taxes, and enter contracts. For this reason, a corporation is sometimes referred to as a ‘legal individual.’
What Are the Key Differences?
As you might guess, there’s a large number of differences between these two types of organizations. Understanding these key points will help you decide which one is best for your needs.
Let’s explore a few of the most notable.
One of the most important differences to be aware of is how each type of business is responsible for paying taxes. An LLC is known as a pass-through entity, a term that means any profits that the business generates pass through the company to the owners.
So, an LLC does not pay taxes as a business and this obligation instead falls onto the entrepreneur.
This makes filing taxes as an LLC owner far more streamlined. Additionally, losses or operating costs that the LLC incurs can be deducted from the owner’s personal tax returns.
When it comes to taxes, a corporation is treated as a separate entity that has its own tax obligations. Corporations pay taxes on the profits that they accrue and also pay taxes on any dividends that they distribute to shareholders.
This scenario is often referred to as ‘double taxation’ since you essentially pay taxes on your company’s revenue twice.
To help offset this expense, corporations can take advantage of federal tax deductions. These can include advertising costs, operating expenses, and employee benefit allocation.
This also encourages corporation owners to reinvest in their business.
When it comes to management, an LLC is fairly flexible. In fact, any member of the company can act as the LLC manager.
Additionally, the owner of the LLC may choose to not have a clearly defined manager. This level of fluidity makes this type of organization an attractive option to many entrepreneurs.
In contrast, corporations employ a much stricter form of management.
By definition, a corporation must implement a formal management structure complete with a Board of Directors that handles management obligations. Corporate officers are also appointed to help manage the company’s day-to-day operations.
Shareholders are considered owners of a corporation, but they remain separate from any business decisions that are made. But, it’s important to note that shareholders have the capability to appoint directors, giving them the power to help shape the corporation.
Similar to management, the structure between an LLC and a corporation is highly different.
An LLC has the capability to freely distribute a stake in the company to members of the organization without considering a specific member’s financial contribution to the company. So, a member of the organization who does not have a substantial amount of capital could still receive an equal share of the profits that the LLC generates.
A corporation, on the other hand, is able to issue a percentage of ownership to its owners, which are known as shareholders. As shareholders purchase more company stocks, they begin to own a larger percentage of the business.
This makes it ideal for outside investors, as they are guaranteed a proportional return for the amount of money that they invest.
Interestingly, a corporation also exists as its own entity separate from its original owners. So, if you were to start a corporation and then leave the organization or sell all of your shares, the corporation would still exist.
In general, the legal protections that corporations can offer are relatively consistent throughout the entire United States. This is due to the fact that corporation laws have been around for decades.
Laws regarding LLC protections are relatively new in comparison, and they tend to differ from state to state. So, the state in which you plan to open your business can have a large impact on what type of organization is best for you.
You can visit this resource to learn more about the benefits of an LLC.
Understanding the Difference Between an LLC and a Corporation Is Essential
The above information will help ensure that you know everything that you need to. From here, the ability to discern the difference between an LLC and a corporation will help you make the decisions that are right for you in the future.
Want to learn more info you should keep in mind? Be sure to explore what the rest of our blog has to offer.