Limited Liability Company vs Limited Liability Corporation (What is the Difference?)
When you are starting a new business, there are plenty of things that you have to take care of. One of the very first things that you have to do is to choose the type of business entity you will create.
Usually, you have three options when it comes to forming a business – a sole proprietorship, an LLC, or a corporation. However, due to a lack of liability protection, people avoid sole proprietorship and go for either Limited Liability Corporation or Limited Liability Company. Since the initials for both of these business entities are the same, it is very easy to get confused and get lost in the semantics. Don’t worry – we are here for you.
In this comprehensive Limited Liability Company vs Limited Liability Corporation guide, we will tell you all you need to know that will help you make the perfect choice for your business!
Without further ado, let’s go!
Short on time and want to quickly know the difference between Limited Liability Company and Limited Liability Corporation? We are here to help! The major difference between the two is the ownership structure of the company.
- Limited Liability Company. Depending on its ownership structure, a Limited Liability Company can be owned by a single member or multiple members. Limited Liability Company combines the coveted limited liability protection with a flexible pass-through structure.
The IRS allows the LLC to be taxed as a corporation or as a partnership. It is very easy to maintain and has very few annual requirements.
- Limited Liability Corporation. On the other hand, a Limited Liability corporation is owned by various shareholders and has a governing Board of Directors. A Limited Liability Corporation also provides limited personal liability to its shareholders for all business-related debts and issues.
There are various legal requirements to maintain the status of a corporation such as Board of Directors, Annual meetings, etc.
Depending on whatever your business requirement is, you can select the one that fulfills your needs. However, one thing is pertinent no matter which type of business entity you form, and that is getting help from a professional LLC incorporation company.
As new business owners, it is very likely that you neither have a legal background nor have the time to try to understand all the legal jargon required to incorporate your business. With the expert help of professional LLC formation services, you can focus solely on growing your business!
- ZenBusiness, with affordable rates as well as an efficient forming process, is the best overall incorporation service available in the market. Revered by its users and well-known in the formation industry, you are in for a treat with this service.
- Incfile caters to those individuals who are on a tight budget and can’t afford to spare money on incorporation services. They offer a free starter business formation package that helps new budding business owners get their LLCs up and running!
Similarities between Limited Liability Company and Limited Liability Corporation
Limited liability companies and limited liability corporations are not polar opposites. They have a few common features and offer similar perks. Let’s see what they are:
Limited liability protection
The overlapping feature that is most important is limited liability protection. This means that both LLC and corporation offer your personal asset protection. Even if your business gets sued, your personal possessions will be protected.
For instance, if in a lawsuit the court rules against you, your car, your house, etc. will be off-limits.
Business name reservation
Came up with a unique name for your company? What if before you can officially use it, some other business entity claims it as their own? Both Limited Liability Corporation and Limited Liability Company give you the sole owner of the business name.
General partnerships and sole proprietorships have to register a DBA name but it doesn’t provide them with exclusive rights to the name. However, when you form a Limited Liability Company or a corporation, the name of your company is yours and yours alone!
Differences between Limited Liability Company and Limited Liability Corporation
When a business is formed, they have to officially register as a specific business entity with the state.
Forming a Limited Liability Company
A limited liability company is formed by one or more individuals, who are the owners. For LLC formation, you have to file “Articles of Organization” with the state. You have to select a business name as well as designate a registered agent for your Limited Liability Company as well. A business operating agreement is required to lay down a few working rules and highlight the hierarchical structure of a Limited Liability Company.
Forming a Limited Liability Corporation
To form a corporation, you have to file “Articles of Incorporation” with the respective state. The corporation has to create a Board of Directors that will oversee the business. Moreover, company bylaws are created according to which the corporation will run its operations.
A limited liability company is a type of business structure that separates your personal assets from business assets. By doing so provides protection and ensures that you have no liability for the financial debts and obligations that are incurred by your business.
No matter what happens in the future, your personal assets such as your home, car, and other personal belongings are going to remain protected and safe. With no liability protection, your personal assets can be used as collateral in order to pay debts after bankruptcy or a lawsuit.
An LLC brings you the best of both worlds and bridges the gap between sole proprietorships and corporations.
Now that you know what a Limited Liability Company and Limited Liability Corporation is briefly, it is time for a detailed comparison so that you would know which one is the best option for your new business. Without wasting any time, let’s get going!
One of the major differences between LLCs and corporations is the way these business entities are taxed.
An LLC is a pass-through tax entity. This means that all the profits from an LLC are passed through to its owners/members. All the profits/losses are reported by the owners while filing their personal tax returns. An LLC has three options for taxation. By default, they are taxed as sole proprietorships and they don’t have to pay corporate income taxes.
The LLC is not, by default, obligated to file its taxes as a separate business entity. This makes filing taxes a very easy and simple job for LLC owners. The operating costs of the LLC can be deducted while filing the personal tax returns.
You are going to have to pay self-employment taxes as well. A few states ask LLC owners to pay franchise tax as well. A franchise tax is a tax levied by the state for providing the LLC the privilege of conducting business in their state. The amount of franchise tax varies from state to state and has to be paid annually.
If you don’t pay your taxes, you will have to pay penalties and, at times, it could even result in the dissolution of your business.
A Limited Liability Corporation is taxed as a separate business entity that earns its own income. Legally, corporations have to pay taxes to the state on their profits – known as corporate tax – as well as tax on the dividends that are distributed to the shareholders.
Since the dividends paid are not tax-deductible, they are taxed twice. This is commonly known as double taxation. However, for smaller corporations where the owners work for the corp, this is not an issue as the owners get tax-deductible bonuses and salaries.
Double taxation is often seen as a disadvantage for forming your corporation but the additional tax responsibility can be offset by various federal deductions which are provided to corps only. For example, a corporation is allowed to deduct all of its business costs such as advertising costs, operating expenses, along with employee benefits like medical plans and retirement plans.
All of these deductions add up to a substantial amount of savings over the passage of time. Since 2018, corporations have to pay a flat 21% tax on their overall profits. This is offset by the double taxation but any income that the corp retains at the year’s end will be taxed only once.
This allows the corporation owners to save money on taxes by putting the profits back into the company. An important thing to remember is that if the corporation has less than 100 shareholders, it can file the taxes as an S-corporation.
An S-corporation can choose to file its taxes as a pass-through entity. It is a good option for those companies who want to get the tax benefits of an LLC as well as the advantages that having a corp provides.
The tax difference between an S-Corp and an LLC is a bit nuanced. There is no double taxation in both S-corp and LLC and they have flow-through taxation systems. The profits of an LLC are subjected to employment tax while the dividends of an S-Corp are not.
Therefore, if you want to avoid paying huge employment taxes, you can for an S-corp. However, an S-corp is not for everyone and it is better if you get the help of expert LLC incorporation services like ZenBusiness or IncFile and let them help you make the right decision for your business.
Another major difference between an LLC and a corporation is the business ownership structure. The hierarchical structure in each business entity has a clear purpose that allows you to make a decision quickly.
Limited Liability Company
On the other hand, LLCs don’t have shareholders but rather have owners. Irrespective of their financial contribution to the LLC, if mentioned in the LLC business operating agreement, all the members may receive equal profits.
An LLC owner can be a resident of the US, a foreign individual, a corporation, or a trust. The business operating agreement defines how membership interests will be transferred in the future, what will happen if the LLC is dissolved, etc.
Limited Liability Corporation
In a corporation, there are shareholders who hold specific shares and percentages in the business. The shareholders can transfer their shares, buy more stock, or sell the stock as they deem fit. If you want to attract outside investors, a corporation is the best entity for your business.
A corporation and its owners are separate from each other – this means that even if an owner leaves the corp, the corporation will continue to exist.
Limited Liability Company
The membership structure of an LLC is flexible. An LLC can be managed by a group of managers or by its members. The members can act as the managers of the LLC as well. An LLC can elect to create no distinction between managers and owners of the business.
Therefore, the LLC management is flexible and less formal which makes it ideal for new entrepreneurs. There are usually two management structures of LLCs.
- Member Managed LLC
- Manager Managed LLC
If an LLC is member-managed, the owners oversee the running of the day-to-day operations themselves. In a manager-managed LLC, there are investors who sit on the sidelines while the appointed managers oversee the running of the LLC.
Limited Liability Corporation
The management structure of a corporation is more rigid and strict than an LLC. A corporation has a formal structure in the form of shareholders along with a set Board of Directors that handle the managerial responsibilities.
There are corporate officers who handle the daily operations of the business. Even though the shareholders are the owners of the corp, they don’t make business decisions and remain separate from the day-to-day operations of the company.
Shareholders hold the power to elect directors. Moreover, a shareholder can be elected as a director as well. Every corporation has individual corporate bylaws that dictate its working. These bylaws are approved by the Board of Directors.
Legally, both LLCs and corporations have various requirements that they need to fulfill to maintain their status. Usually, these rules vary from one state to the other. However, generally, corporations have more annual requirements as compared to LLCs.
Limited Liability Company
LLCs have a few record-maintenance requirements. For instance, an LLC doesn’t have to hold annual meetings, keep minutes, etc. A few states require an LLC to file an annual report while others don’t.
To know the rules and regulations of your state, and to ensure that you don’t miss any important deadlines, it is a good idea to take the help of LLC incorporation services such as ZenBusiness or IncFile. They will take care of all your paperwork!
Limited Liability Corporation
Every year, corporations need to hold a shareholder meeting. The details of this meeting are documented in the form of notes known as corporate minutes. Moreover, a corporation has to file an annual report to make sure the information of the corp with the Secretary of State remains current.
If any changes are to be made in the business, a corporate resolution needs to be passed at a Board of Directors meeting.
Which one should I choose?
Now comes the million-dollar question: Which one should I choose from Limited Liability Company or Limited Liability Corporation? Well, the answer to this question depends on what your business needs and requirements are.
Do you want a flexible managerial business structure? Are you searching for an easy-to-form, simple startup process? Would you prefer not to pay corporate income taxes? If your answers to these questions are yes, then you should form a Limited Liability Company.
In case you are going to get various investors for your company, then you should go for a Limited Liability Corporation that has a rigid structure as well as established legal precedents that will be of great help.
If any of the business entities would work for you, then we recommend that you start with a Limited Liability Company. Why? Well, because a Limited Liability Company is easier to form as well as maintain. Moreover, it is less expensive to start and you don’t have to worry about various legal formalities.
There are plenty of online incorporation services that will take care of the entire formation process for you at very affordable and reasonable rates. Moreover, these LLC incorporation services will not only help you get your business entity up and running, but they will also provide services such as registered agents as well as business operating templates, web domain, EIN acquisition, etc.
Both Limited Liability Companies and Limited Liability Corporations have their own benefits and legal obligations. They provide limited liability protection for personal assets which makes them equally beneficial.
However, there are distinct features and characteristics of each which we have compared above comprehensively. The choice between Limited Liability Company and Limited Liability Corporation is yours to make. If you are still not sure, we recommend that you take the expert help of professional incorporation services. This way, they will handle all your paperwork and you can focus on making your business a success.
- ZenBusiness is a good choice for those individuals who are searching for quality, affordable services with glowing customer reviews. They have stellar customer service so that if you have any queries, you can rest assured that you will get authentic answers!
- Incfile is the only stop for people who are on a tight budget and can’t spare additional money to hire professional services. With the free business formation package that IncFile offers, you will get expert services without paying a dime!
What is the difference in business ownership between a Limited Liability Company and a Limited Liability Company?
In a Limited Liability Company, the owners have equity interest in the business and its assets. In a corporation, the shareholders own a different percentage of shares in the business.
How are profits and losses managed in LLCs and corporations?
The profits and losses in a limited liability company are passed through to the owners. In a corporation, the profits, as well as the losses, are held by the corp.
What is the difference between LLC and Corporate Income Taxes?
Corporations have to pay a corporate tax at the rate of 21%. Moreover, the shareholders pay tax on the dividends that they receive as well. The owners of a Limited Liability Company receive a distributive share of the companies profits and then they pay taxes on that amount while filing their personal tax returns.
How do LLCs and corporations differ in terms of self-employment taxes?
Legally, Limited Liability Company owners are considered self-employed. Therefore, they have to pay a self-employment tax on the share of Limited Liability Company profits that they get annually. On the other hand, the shareholders of a corporation are not self-employed and they don’t have to pay the self-employment tax.