LLCs versus Corporations and S Corporations

Understanding the differences between a limited liability company and a corporation will assist you in selecting the appropriate business entity for your organization.Corporations and limited liability companies (LLCs) are two types of company structures. Both forms protect the owners from personal liability for the debts and other obligations of the company. For example, if you own a corporation or an LLC that files for bankruptcy, creditors will not be able to seize your home, car, or other personal property. However, they differ in terms of who owns and manages them, how they are taxed, and how they are controlled by law.

What Is a Corporation?A corporation, often known as a c-corporation, is a type of corporate entity that exists independently of its shareholders. The company is responsible for debts and wrongdoing, and can hold property or enter into contracts as an entity independent from its owners. By purchasing shares of stock in the firm, shareholders become owners. They have a very limited participation in the corporation's management, and they solely pay taxes on the profit distributions they get.
What Is an LLC?One or more individuals or groups, known as members, own an LLC-structured business. Members of LLCs are not separated from the corporation in the same way that shareholders are. The LLC does not pay taxes on its own. Members pay personal income taxes on the LLC's profits, a procedure known as pass-through taxation. Although some LLCs choose alternative management structures, LLC members can operate the company.
What Is an S-Corporation?An s-corporation, which combines aspects of c-corporations and LLCs, is another type of corporation. An s-corporation, like a c-corporation, is a separate legal entity with limited accountability for the debts and other responsibilities of the company. However, shareholders in an s-corporation, like members of an LLC, are liable for paying taxes on the business's income.
How Ownership Works in a Corporation and an LLCA set of bylaws spells forth the regulations for corporate ownership, management, and other functions. An operating agreement is used by LLCs to specify roles and operating standards.
The number of shares of stock a shareholder has in a corporation defines the percentage of the company he or she owns. Assume a company issues 100 shares of stock at a price of $10 per share. A $250 investment would give a shareholder 25 shares of stock, or a quarter of the company. This shareholder would receive 25% of the distribution if the corporation distributed annual profits to shareholders
Stock is not issued by LLCs. The operational agreement specifies each member's amount of ownership as well as their share of earnings (or losses). The proportion of ownership determines a member's profit share, although an LLC can distribute profits in any way it wants as long as it respects the IRS's "Special Allocations" guidelines.
Ownership Is Unrestricted for Corporations But Not LLCsC-corporation shareholders have the freedom to buy, sell, and transfer their shares to anybody on the open market.
LLC members can only participate in the firm or sell their investment pursuant to the operating agreement's restrictions (or the rules set by state law when no operating agreement exists). The operating agreement of an LLC may oblige members to sell their shares back to the other members, or it may grant approval powers to the other members over any sale or buyer. When a member leaves an LLC, certain states require it to be dissolved and reformed.
S-Corporations Restrict Certain Types of OwnershipWhile c-corporations can issue all of its stock to a few people or thousands, and to individuals or other enterprises anywhere in the globe, s-corporations can only have 100 shareholders, and all of them must be citizens of the United States. Individuals are also the only ones who can own shares in an s-corporation; corporations, LLCs, and partnerships are not permitted to do so.
How Corporations and LLCs Are ManagedIn general, firms must adhere to state-specific management regulations. LLCs are subject to less government regulations when it comes to how companies are run..
How Corporations Are ManagedA board of directors and officers, such as a president and chief financial officer, are essential for corporations. Most states require businesses to file their bylaws with the state, which specify the rights and obligations of these executives.
Members of the board of directors are in charge of appointing the company's executives as well as managing and reviewing the company's direction. If, for example, a corporation's profits drop or the company loses money, the board of directors may become quite active. However, it normally will not be involved in choices such as hiring, salary, vendor selection, and so on. The company's officials are in charge of making such day-to-day choices.
Shareholders may be asked to vote on matters such as appointing new board members, but unless they are also officers, they are rarely involved in the day-to-day running of the company.
Annual shareholder meetings are mandated by law, and the minutes of those meetings must be kept. They must also provide annual reports.
How LLCs Are ManagedAn LLC's operating agreement is the equivalent of a corporation's bylaws. However, unlike corporations, most LLCs are not required to file an operating agreement, though certain states do.
LLCs have a lot of leeway in terms of how they run their businesses. They do not need a board of directors, corporate officials, annual meetings, or annual reports in most states. An LLC can be managed by all or some of its members, and some LLCs appoint an outside management who does not own any of the company's shares.
Although just a few states need LLCs to file annual reports, the majority of them demand other yearly files in order to keep their LLC status.
How Corporations and LLCs Pay TaxesThe corporation, not the shareholders, is responsible for paying taxes on the company's profits. Dividends paid to shareholders, on the other hand, are subject to taxation. Many people consider double taxation to be a disadvantage of the company form. Corporations are also entitled to a number of tax deductions for business expenses that can be used to reduce their tax liability.
On the other hand, S-corporations do not have to pay corporate taxes. Profits made by the company are distributed to the shareholders (as is done with an LLC).
In an LLC, all of the company's revenues (and losses) are distributed to the members. Single-member LLCs are taxed as sole proprietorships, which means they report and pay taxes on their business profits on their personal tax returns.
LLCs with several members have the option of paying taxes as a partnership or a corporation. LLC members pay taxes on the firm's profits on their personal income tax return based on their percentage of ownership when the company is taxed as a partnership.
When an LLC elects to be taxed as a corporation, the LLC pays corporate taxes and members pay taxes on any earnings distributed. Profits that are re-invested in the company are not taxed since members are not compelled to pay taxes on earnings that are retained.
How LLCs and Corporations Are FormedBoth LLCs and corporations are founded by submitting a document to the appropriate state government, which is usually the Secretary of State. Articles of incorporation are filed by corporations, whereas articles of organization are filed by limited liability companies. (In various states, the documents may be referred to by a different name.)
Basic information about the firm, such as the name and location of the company, the address of members (in the case of an LLC) or directors and officers (in the case of a corporation), the type of business, and its purpose are often included in the documents. Corporations must also state how many shares of stock they intend to issue.
The cost of forming a corporation varies by state and, in some cases, by the amount of shares the company issues. In Arizona, filing articles of incorporation can cost as low as $60, whereas in Texas, it might cost up to $300.
Depending on the state, filing articles of incorporation for an LLC might cost anywhere from $50 to $100.
Other yearly expenses that corporations and LLCs must pay include annual report filing fees, franchise fees, and business license fees.
Choosing Between a Corporate and an LLC StructureCorporations and limited liability companies (LLCs) both have the benefit of limiting the owners' personal liability. Your needs will determine which entity is best for you. Here are some things to think about:
LLCs are more flexible and have fewer formalities. LLCs, on the whole, do not need you to have meetings or submit annual reports. They also provide a great deal of flexibility in terms of administering the business, whereas corporations are compelled by law to have a set management structure, have meetings, and follow other formalities.
An LLC's tax compliance is usually easier. Unless the members want to be taxed like companies, LLCs do not pay taxes. On their personal income tax returns, the majority of members pay taxes on business profits. Because the corporation is taxed on earnings, and shareholders are taxed on profit distributions, corporations are liable to double taxation.
As a corporation, it is easier to recruit investors. Corporations are preferred by investors because they can invest in the company or sell their stock on the open market without restrictions. Buying or selling ownership in an LLC normally necessitates the approval of the other members, and there may be additional requirements. In addition, S-corporations have ownership requirements that make them less appealing to investors.
Employers now have more alternatives for delivering benefits to their employees. Most LLCs are unable to offer benefit plans such as stock options. Corporations can deduct many benefit plan expenses as well, although LLCs can normally only deduct a percentage of the cost of any benefits they provide.

​​​​​​​​​​​​Yoel Molina, Esq. (AKA “Mo”)

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