When starting a business one of the most important choices you make is the decision of how to structure your company. Small business owners benefit from knowing the key differences between the types of business entities, so they can properly identify their business. When considering LLC vs. Corporation, knowing how they are different can help you determine the structural elements your entire business is built on.
Our North Carolina incorporation lawyers want to help you learn the best approach to setting up your business so that you can begin operating your business and making a profit.
Let's explore the different avenues for structuring a business entity by looking at the differences between an LLC and a corporation.
What Are the Types of Business Entities?
In order to know the best approach for your business, you need to know the differences between an LLC vs corporation. To gain a greater level of understanding, it's important to know what kinds of business entities exist. Each type of business is structured in its own unique way. Each entity type will have advantages and disadvantages, particularly in how they are taxed by the federal government and the types of legal repercussions that can take place to pay off business debts.
A business type that has one owner who is responsible for the income taxes related to the business. This individual is self-employed and while they may have employees who work for them, they are solely legally liable for debts.
Limited Liability Company
Known as LLCs, limited liability companies have a structure where the owner(s) are not personally responsible for the debts and liabilities and therefore cannot be pursued for repayment of these debts.
S-corps are corporations that pass the income, losses, deductions, and credits through their shareholders for income tax purposes. The business owners have limited liability to the corporation, so their personal assets cannot be accessed to pay debts.
C-corps are business entities that must pay corporate taxes on their profits prior to distributing the remaining profits to shareholders in the form of dividends. Individuals who receive income from the corporation must then report that income on their personal income tax records.
What is Limited Liability?
The term "limited liability" refers to both LLCs and corporations. In both entity structures, the business and personal finances are kept separate. This way, owners are not held personally and financially responsible to pay off debts or lawsuits with their personal earnings. This does not, however, absolve owners of the business from financial responsibilities related to their own negligence or contractually obligated terms.
What are the Key Differences Between an LLC vs Corporation?
When setting up your business structure to begin operating, it can seem overwhelming. From ownership and taxation to legal responsibilities, there is a lot to consider when determining which type of organizational setup you will implement. Looking specifically at LLCs and corporations, we offer this approachable resource to identify the notable differences between the two so that you can make the most informed decision for your company.
Both corporations and LLCs are required to register their business with the state in which they operate. Additionally, each has to adhere to annual reporting and maintenance agreements depending on the state where the business is located.
Corporations have significantly more annual requirements. They must:
- Hold annual shareholder meetings.
- Document and report corporate minutes from shareholder meetings.
- File an annual report with the Secretary of State.
- Business actions and decisions must be voted on by the board of directors.
When it comes to an LLC, some states may require the business to hold meetings or file an annual report, so it is important to check with the Secretary of State where you operate the business to ensure you meet all the required guidelines to remain in good standing and to maintain your business' legal liability protections.
The Structure of Ownership
Corporations are owned by shareholders who own a part of the business based on shares. This allows investors to purchase or sell shares to own either more or less of the business. A corporation is a great business structure for anyone hoping to attract outside investors for ownership. Furthermore, the business exists in perpetuity- if an owner leaves or divests from the business, the corporation still exists with its remaining owners. The entire structure of corporate ownership comes down to owning a piece of the business based on the amount that you invest in the business itself through shares.
In an LLC, the owners of the business are called members. Unlike a corporation where ownership is based on the amount of investment, in an LCC distribution of ownership to its members is not restricted or based on the amount of investment they contribute. So, two members might own equal shares of the business, despite one member contributing more financial resources to the business than the other member.
Who the Managers Are
The management structure for LLCs is much more flexible than for corporations, whereas in a corporation the management structure is much more strict.
An LLC can be managed by the owner or by an appointed manager:
- Member-managed: when the owner(s) oversees the day-to-day operations of the business.
- Manager-managed: appointed manager(s) who do not own the business and operate the day-to-day business.
For corporations, there is more formal handling of the management structure:
- Board of directors: handle the management responsibility related to generating profits for shareholders.
- Corporate officers: high-level management assigned by the board of directors to handle the day-to-day managing responsibilities related to the business.
- Shareholders: own part of the business based on shares, but do not have any oversight in the day-to-day running of the business.
For most startup businesses, an LLC structure that is less formal is usually ideal. However, if you are looking for outside investors to build your business and own shares who will not operate the daily ins and outs of the company, a corporation might be a better fit.
When it comes to tax filing for your business, there are different expectations depending on if you are running an LLC or corporation.
For LLCs, business profits are passed through its ownership, therefore, owners must report profits and losses related to the business in their personal tax filing. This makes filing taxes for LLC owners a much simpler, process. Depending on sole proprietorship and other state requirements, LLCs may be required to additionally pay self-employment tax and/or franchise tax.
Corporation tax filing is much more complicated than with an LLC. Corporation tax is not paid through the personal filing of ownership, but as their own separate legal entity and may be subject to double taxation. With double taxation, the business pays taxes on all profits in their corporate tax filing and additionally, the shareholders report their income- the salary and distributions received from the company- on their personal tax returns, and are subject to taxation. A corporation can avoid double taxation by filing as an S-corp, which can be done if there are 100 or fewer shareholders and meet other ownership requirements set forth by their state.
Regardless of if your business is an LLC or a corporation, failing to report and pay company taxes can result in penalties, legal fees, and the potential loss and dissolution of the business. Speak with a small business formation attorney or an accountant if you have any questions about the status of your tax filing for your LLC or corporation.
Call Our Incorporation Lawyers for Your Business Startup
Are you unsure which type of business entity structure is the best one for your company? Contact an incorporation lawyer at The Doyle Law Offices, P.A. for help in identifying the structural needs that best suit your business. Whether you are a small start-up looking to establish yourself as an LLC or you are a larger business looking to acquire outside investment options as a corporation, our experienced attorney Hank Doyle can help.
Call us today at (919) 228-4487 or fill out the contact form below.