Differences between Corporations and LLCs

Differences between corporation and limited liability company (LLC).

Both corporations and LLCs offer liability protection. That means if the company is sued, the only assets available to the claimant are those that are in the company. The owners’ assets which are held outside the company are not at risk unless the owner is also personally liable.

A corporation is owned by shareholders. Shareholders, in most circumstances, have the right to vote their shares to elect directors. The shareholders receive distributions (dividends) based on the number of shares owned. Unless restricted, shares can be sold. Upon dissolution of the corporation, the shareholders receive assets from the corporation, if any, according to the number of shares held.

A LLC is owned by members, who either have a number of Membership Units or a Percentage of the Company. The rights and obligations of the Members are set out in the Operating Agreement. If there is no Operating Agreement, the state statute will control the ownership rights in the LLC.

Generally, a LLC is more flexible than a corporation. Tax wise, a LLC is a better vehicle to hold assets such as real estate than a corporation. Please discuss this with your tax advisor if you have this issue.

A corporation is easier to use if you want to treat the owners as employees otherwise the earnings of the LLC flow through to the owners who must report and pay taxes on the earnings. Estimated tax deposit will need to be made by owners of a LLC whereas as shareholders of a corporation, the shareholders could be paid as employees and the corporation would make the necessary tax deposits.

Some times, taxes can be reduced by the use of a corporation. Talk with your tax advisor about splitting the revenue between wages and return on investment for corporate ownership. This is not generally allowed with a LLC. If an owner is active in the LLC, all revenue allocated to that owner is usually considered wages for tax purposes.

Call me if you want to discuss the choice between a corporate or limited liability company.

Virgilia (Jil) S Culver, Attorney