What is an LLC?

An LLC, or limited liability corp. is a business structure that combines elements of a sole proprietorship, partnership and corporation to protect the owners of a company from liabilities and debts. An LLC business structure protects your personal assets if you’re being sued. Likewise, if the LLC files for bankruptcy, the owners — also known as members— don’t have to pay the business debts with their personal funds. However, for taxes, the LLC resembles a sole proprietorship, so the LLC does not pay taxes itself. Instead, the owners include profits and losses on their personal taxes. The LLC can tax itself as a corporation, but in that case it must follow tax and filing requirements for corporations.

What is a Corporation?

A corporation is a business structure separate from its owners. Corporations have the same rights as individuals. They can hire employees, borrow money, file lawsuits, own assets, pay taxes and enter contracts. Limited liability is a crucial defining aspect of corporations because it allows shareholders to take part in profits through stocks and dividends without being personally responsible for the corporation’s debts.

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Difference between LLC and corporation

Here’s a look at the primary differences between LLCs and corporations:

Taxes
One of the greatest differences between LLCs and corporations is how they’re taxed. An LLC is taxed as a pass-through entity, meaning that profits pass through to the members — or owners — and are reported on the owners’ personal tax returns. The owners deduct business expenses to offset other incomes on their tax return and reduce their personal tax liability. Reporting profit and losses on personal tax returns typically makes filing taxes for an LLC simpler than it is for a corporation.

Corporations are always taxed as a separate entity. Corporations are responsible for paying taxes on their profits and shareholder dividends. Because dividends aren’t tax-deductible, they’re taxed twice. However, corporation-exclusive federal deductions offset this double taxation.

Business Ownership
Ownership is another major difference between LLCs and corporations. An LLC has the freedom to distribute ownership of the company to any or all members without regard for how they contributed financially. A corporation issues and sells percentages of the business to shareholders. Shareholders purchase more stock to own a larger percentage of the company or sell stock to own less. A corporation exists separate from each individual, so regardless of whether the original owner leaves, the corporation remains fully intact.

Management
LLCs have a more flexible management structure. An LLC can be managed by the owners or a manager. When a manager oversees the daily operations of the LLC, the owners typically don’t have an active role in the business operations.

With a corporation, a board of directors generates profits and assigns a corporate officer to manage daily operations. The owners, or shareholders, typically don’t have any involvement in daily operations outside of possibly approving major decisions.

Reporting requirements
Both LLCs and corporations must fulfill reporting requirements set by their state. Since the board of directors must vote on any changes to the business, corporations have to hold an annual shareholder meeting and file annual reports. LLCs, on the other hand, are not required to hold annual meetings or have a board of directors. Though they have to complete state-mandated reporting retirements, they have far fewer requirements than corporations.

Who can help you decide between an LLC and a corporation?
Choosing between an LLC and a corporation is a complex decision. Because the type of structure you choose has major tax consequences and every business is unique, consider talking to a professional before making a decision. Two professionals you can consult include:

• Attorney: An attorney who has experience with both LLCs and corporations can examine your business plan and recommend the best structure.
• Certified Public Accountant (CPA): You may also want to talk to a CPA who can fully explain the tax consequences for each business entity.