When you start a new business, one of the first decisions you must make will include deciding how to structure the company. You may have several business structuring options available to you, with the LLC and corporation being two of the most popular types. An experienced business attorney can help you determine which legal structure will best serve your needs and goals for your new company.
What Is an LLC?
An LLC (limited liability company) is a type of business structure that combines features of partnerships and corporations. An LLC allows business owners to manage their company like a sole proprietorship or partnership and utilize pass-through taxation. However, LLCs also offer company owners limited liability protection similar to that provided by corporations.
Key features of an LLC include:
- Simpler set-up process and fewer formalities for managing the business’s operations.
- Owners (members) can manage the company or appoint one or more managers to handle day-to-day operations
- Taxed like a sole proprietorship or partnership (unless the company elects a different form of taxation)
What Is a Corporation?
A corporation is a legal entity that has a separate existence from its owner (shareholders). Management of a corporation occurs through a board of directors, elected by the shareholders, who may appoint and oversee one or more officers to handle day-to-day affairs. Corporations offer shareholders limited liability for the company’s debts, with shareholders liable only up to the amount of their investment in the corporation.
Key features of corporations include:
- A more formal, structured management format with shareholders, directors, and officers
- Subject to Subchapter C “double-taxation” by default (corporation pays taxes on its profits, shareholders pay income tax on dividends distributed from the corporation’s profits), but can elect pass-through Subchapter S taxation
- Shareholders free to sell their interests in the company (subject to any contractual restrictions)
Differences Between LLCs and Corporations
Some of the primary ways in which LLCs and corporations differ from each other include:
- Taxation: LLCs offer pass-through taxation by default, but can elect C-Corp taxation (“double taxation”) or, if they qualify, S-Corp taxation. Conversely, corporations have double taxation by default but can elect S-Corp taxation if they meet the criteria.
- Ownership and management flexibility: LLCs have considerably more flexibility in structuring the company’s ownership and management, whereas corporations have more rules to follow, including generally requiring a director or board of directors to oversee the company’s operations.
- Formalities and recordkeeping: LLCs require fewer ongoing formalities, unlike corporations, which must hold annual meetings, maintain minutes for shareholder or board meetings, and keep documentation of board actions.
- Raising capital: The corporate form can make it easier for businesses to raise capital from outside investors, compared to LLCs, which share features with partnerships that can make bringing outside investors in more challenging.
Choosing the Right Structure for Your Business
There are various factors to consider before you settle on a legal form for your business. For example, LLCs may work better for small business owners who own their companies solo or have one or a few partners, as LLCs can offer simplicity and flexibility in structuring the business’s ownership and management. Conversely, corporations may work better for entrepreneurs seeking outside investment or who plan to grow their businesses substantially. Furthermore, entrepreneurs should consider other factors, such as:
- The business’s industry
- Financial and operational goals
- Tax situations
- Hiring plans
- Need for investment
Contact a Business Attorney Today
If you’re planning on starting a new venture, an experienced business attorney can walk you through your legal options for structuring your business and which one might be best to achieve your goals. Contact Lancaster Tech Law today for an initial consultation to get help starting your new business.