Difference Between A Corporation And LLC

The LLC which stands for Limited Liability Company has become one of the most popular business entities in the last few years. But remember just because it's popular does not mean it's the best choice for your business. The following is a list of Pro's and Con's that will help you determine if this entity structure could be right for you.

PRO's:

Limited Liability: Same as a traditional corporation the LLC protects its owners from being held personally liable from business judgments and debts.

Flexible Management Structure: Ran by the members and/or managers the LLC runs off of an operating agreement but does not have the strict requirements of meetings, minutes and bylaws like a traditional corporation which means less paperwork and hassles.

Flexible Distribution of Profits and Loses: Unlike a traditional corporation which must flow down profits and loses based on capital contributions members of a LLC can decide how they want the company's profits and loses to be distributed to the owners. And an LLC is a pass threw entity which means all profits and losses pass down to a personal level instead of being taxed first at a corporate level.

CON's:

Newer Entity: Unlike corporations that have been around for a very long time LLC's are fairly new and have not been tested completely with the court system so it's hard to say how well they will hold up in the coming years.

Taxes: One member LLC's will be treated as a Sole Proprietorship for tax purposes which has a higher tax rate then corporate entities. Also LLC's are not able to benefit from corporate tax treatment that can result in a large tax savings when money is left in the business for expansion and other business needs and members are not able to experience the same fringe benefits as those in traditional corporations.

Different States Rulings: Some states enforce different restrictions and tax consequences on LLC's vs. traditional corporations.

In contrast a traditional Corporation and for these examples I am going to refer more to the C Corporation has been around a lot longer then an LLC and still remains a popular business entity choice for business owners. Especially for those wanting to form larger organizations based on a corporations ease of capitalization vs. some of the other entity choices. Bellow is a list of Pro's and Con's to help you decide if this entity structure is right for you.

PRO's:

Limited Liability: Again like the LLC the corporation is the only other entity that protects all of its owners from being held personally liable from business judgments and debts.

Tried and Tested: Unlike the LLC which is fairly new a corporation has been around as a legal entity for a long time and has been tried and tested in the court systems proving its liability protection.

Benefits: C Corporation's offer Officers and Employees many fringe benefits that are not available to owners of other business structures.

Taxes: Corporate tax rates are usually lower then individual tax rates and have the ability to carry corporate loses forward up to 15 years.

CON's:

Corporate Formalities: Corporation's by far have the most corporate formalities then any other business structure. Business owners will need to keep up on meetings, minutes and company bylaws to keep their corporate veil from being pierced which if that happened could result in a loss of liability protection.

Double Taxation: With a C Corporation if the owner/stockholder decides to take their compensation in the form of a dividend it would result in the dreaded "double taxation".

The above examples are just meant to help you understand the two entity types a little better but are in no means meant to take the place of a CPA or Attorney. It is always advised that you seek the help of a professional when deciding which business structure would best suit the needs of your business.