5 Differences Between Corporations and LLCs

Disclaimer: Obviously, this blog does not provide legal advice. How do you know? This is free. Legal advice you have to pay for.

Two of the most common business entities around are the Limited Liability Company (LLC) and the corporation. Business owners should seriously consider entering into one of these entities as they provide significant liability protection. But what’s the difference between them? Below are five differences between an LLC and a corporation. Later, we’ll discuss ways to help select between them.

  1. Taxes. LLC’s and corporations are typically taxed differently. Corporations suffer double-taxation – the profits of the company are taxed, but so are the dividends to shareholders, and their capital gains. An LLC is a “pass-through” entity according to the IRS. This is their way of saying they don’t recognize the LLC, but instead tax it either as a sole proprietor, a partnership, or a corporation. Generally, the LLC can decide how it is to be taxed and can avoid double-taxation.
  2. Deductions. Because the LLC is a “pass-through” entity, the IRS allows members to deduct the company’s losses from their personal income (this is allowed for S-corps as well). However, all profits are taxed even if they were not distributed to the members. On the other hand, a corporation’s shareholders cannot claim deductions based on the company’s losses, but can reinvest profits into the company and avoid taxation on that amount.
  3. Organization. The organization of the business can be very different under the two structures. A corporation typically has laws specifying the general corporate structure. Certain meetings are outlined and required (like shareholder meetings) and a number of reports are required annually. The LLC, on the other hand, is very flexible in how it is organized. Members don’t need to be managers, managers could operate independent of members, any sort of boards or committees could make the decisions, or it could be the simple will of one person. LLC’s bring flexibility to run the company however you want.
  4. Owners. Membership and ownership are different. The LLC and C-Corp do not have ownership restrictions, but the S-Corp is limited to just 100 shareholders. Meanwhile, all corporations must give an equal vote to each share. The LLC can determine in the operating agreement how voting is divided among members, whether it be by contribution amount, time spent working with the company, or any other reasonable scenario the members decide. They could even decide that members don’t vote at all, except in certain matters.
  5. Ease. Often the most important difference (from the perspective of the new business owner) is that LLC’s are much easier and usually cheaper to establish. Because of the stricter reporting requirements of corporations, many find it maintain an LLC. The downside is that corporations are typically better respected and are more likely to receive investments.