LLC vs Corporation

Both LLCs and corporations are business entities created for the purpose of asset and liability protection.

LLCs tend to have more flexibility in management and taxation and usually have less strict requirements for recordkeeping than corporations.

Corporations tend to be more structured than LLCs and offer capabilities better for certain businesses -- for example easy transferring of shares -- at the cost of stricter requirements and more work to upkeep.

LLCs are owned by members, who each own a percentage of the LLC. There are usually restrictions on the transfer of ownership among members that can make any sort of change of ownership extremely difficult for LLCs. The same is not true of corporations.

Corporations operate on a system of shareholders rather than members. A corporation will issue a certain number of shares, then ownership of these shares determines ownership of the company. Shares can be transferred easily between people and because the corporation is not directly tied to any one person and rather to the shares they possess, the corporation is not particularly affected in the case of the loss of a shareholder.

Recordkeeping and Management

The more-intensive recordkeeping requirements for corporations can be an unnecessary hassle depending on the structure of your business. LLCs comparatively have very lax recordkeeping requirements which often make more sense for smaller businesses

Corporations are also required to have a slew of managerial processes in place in order to operate correctly as a corporation. This includes having a board of directors and officers, annual shareholder meetings, annual reports, and much more. Although this structure can be extremely beneficial in keeping a large business transparent and productive it is also a large time and resource commitment.

Tax Benefits

Both corporations and LLCs have multiple tax options depending on size and structure.

Corporations are taxed as S corporations or C corporations depending on the shareholders of the business and the size of the business. Generally S corporations are considered more favorable for taxes, as C corporations pay both corporate income tax on profits as well as having shareholders pay personal income tax (commonly called “double taxation”).

LLC’s can be taxed as a sole proprietorship, partnership, S corporation, or C corporation. Once again the S corporation classification is generally desirable, as sole proprietorship, partnership and C corporation all have expensive tax structures for businesses with significant profits.

Conclusion

For many the deciding factors when deciding what entity to create and how to classify it will be taxes and upkeep. Although upkeep can be analyzed by the business owner to best fit their personal needs and vision for the business, decisions related to taxes are best made by consulting a tax professional in order to ensure you know how a business will be taxed under each structure and classification.

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