Saturday, June 30, 2012

LLC Vs Corporation - The Similarities and Differences

The LLC and the corporation are the two competing choices when it comes to deciding on a legal entity for running a business. Both offer the same level of personal asset protection for the owners of the business.
While the corporation has been around longer and so has a longer history of legal enforcement of its liability protection, the LLC protection provisions are based on the same principles and language of corporate statutes. What this means is that the courts will apply the same precedence by analogy when it comes to limited liability companies.
A corporation must have a central body of management structure. This is accomplished with a Board of Directors. Every corporation has a Board and its members are elected by the shareholders to serve terms. The Board has the authority to manage the company. Generally the Board will hire officers to execute the day to day operations based on the overall decisions agreed to by the board. Shareholders in their capacity as shareholders do not have management authority.
The LLC is a flexible shell when it comes to management. There are no required structures and a central management body is not required. A limited liability company can be member managed - here, the owners (members) have management authority by virtue of being members. However, this entity can also be set up similar to a corporation and can create a Board of Managers as the management authority. In summary, an LLC can start with a blank slate when it comes to management structures and can define how it wants to be governed based on the specific circumstances.
Both entities issue a unit of ownership to its owners. For a corporation, shares of stock are issued while membership units are given by a limited liability company. For a corporation, every share must represent an identical unit of ownership. For an LLC, there is the option to define different rights and obligations to members separate and apart from the membership unit. Corporate shares can be publicly traded if the business ever gets big enough to want to go public. There is no option for public markets for an LLC. It is more suitable for privately held businesses.
Management Structure Options
A third of the benefits of an LLC is that it is a flexible entity when deciding how the business will be managed. The members of a limited liability company can choose between two simple management structures: (i) member managed or (ii) manager managed. The laws afford this benefit by allowing members great flexibility in deciding how they want the limited liability company business to be managed and what rules to impose upon the business when it comes to governance and management.
The corporation laws of each state generally mandate that a corporation hold certain meetings and document corporate decisions with shareholder or director votes and resolutions. The limited liability company is not legally required to maintain as much paperwork or hold mandatory meetings, but it is always a good idea to engage in some governance and record keeping. Still, it is is preferred by busy business owners because the owners can focus more on operating the business without worrying about a lot of formalities or maintenance.
Tax Matters
The limited liability company beats the corporation hands down when it comes to taxation. This is because the IRS lets it be taxed however it chooses. It automatically qualifies for pass through, single layer of taxation but it can also elect to be taxed as a C corporation or an S corporation. The corporation by default is subject to double taxation which means that profits are taxed twice. It does not have any automatic qualification of a single tax structure, but there is a limited option to elect S corporation status if a corporation can meet and continue to maintain a laundry list of qualifications and limitations.
In essence, the LLC is more of a small business vehicle while the corporation is for larger businesses and ones with a larger investor base.

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