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.
Management
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.
Ownership
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.
Paperwork
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.
Article Source: http://EzineArticles.com/5466917
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