If you’re considering starting a business, then it’s possible that you’re looking at both the LLC and the corporation as options for your entity type.
To the untrained eye, limited liability companies and corporations can look quite similar, and it’s true that the two business types have a lot in common.
That said, there are also several key aspects that make the two unique. In this guide, we’ll cover both the similarities and differences between LLCs and corporations.
Similarities of LLCs & Corporations
LLCs and corporations are both formal business entities, as they are recognized by state governments as official, regulated businesses.
Owning and operating one of these business types has its own benefits ― the formality of these structures tends to instill confidence in the business. That’s not to say that informal businesses (like sole proprietorships and general partnerships) aren’t trustworthy, but appearances are powerful.
The primary reason people choose to form an LLC or a corporation is for personal asset protection. Both LLCs and corporations have what’s commonly referred to as a corporate veil, which creates a barrier between the company’s finances and the personal assets of its owners.
This division of assets protects the members in case of a lawsuit or debt, because if the business is sued or defaults on a debt, the owners’ personal assets cannot be seized to pay the debt (unless those members committed fraud, or otherwise failed to keep the business in good standing).
These entities also have another important similarity: their names are protected. Once you form an LLC or corporation under a given name, no one else can use that name in your state. In fact, in most states, the names of businesses also can’t be deceptively similar.
This avoids confusion, and it keeps the names of LLCs, corporations, and other formal business entities unique.
Finally, both an LLC and a corporation can be owned by other companies (i.e., be the property of a parent corporation). However, if an S corporation does not share this similarity, as this type of company cannot be owned by other businesses in most cases.
Advantages of the LLC
First, LLCs and corporations face different taxation policies. LLCs have a flexible approach to taxation. They can choose to be taxed as pass-through entities and have their members pay taxes on their personal tax returns, or they can be taxed as corporations and pay their taxes on the corporate level.
Corporate taxation is a bit complicated, and it’s widely considered to be more expensive, because C corporations face double taxation. This means that the corporation’s income is taxed twice: first, the entity pays the tax as a business, and then the members pay taxes on the dividends they receive from the business.
S corporations are taxed as pass-through entities much like LLCs, but the S corporation has quite a few restrictions that make it far less common than the C corp.
Another difference between LLCs and corporations is how much work the business has to do to stay compliant. The paperwork and record-keeping necessary for a corporation is extensive.
For example, each year, the corporation has to hold meetings for its directors and its shareholders, and minutes from each meeting must be recorded. LLCs do not have the same maintenance requirements, and even holding meetings is optional, not to mention recording minutes for them. For many businesses, the sheer simplicity of running an LLC is a huge advantage.
Advantages of the Corporation
Attracting external investors in an LLC is much harder than it is for a corporation. After all, corporations can issue shares of stock, whereas LLCs can’t ― and the vast majority of private investors prefer stock as their investment of choice.
Furthermore, if you’re trying to attract venture capital investors, you should absolutely form a corporation instead of an LLC, because it’s extremely rare to see VC investments in a pass-through entity.
Another reason the corporation might be a better choice is that it is a much more established business type, and therefore the legalities are consistent, with plenty of precedent from the courts. Corporations have been around for hundreds of years, while the limited liability company only gained nationwide acceptance in the mid-1990s.
Which Is the Right Choice for You?
Obviously, it’s difficult to make any blanket statements when asking such a subjective question, but we do believe there are some situations where either the LLC or the corporation is clearly the better option.
You should probably form a corporation if you have aspirations to expand your business significantly, because it’s so difficult to attract investors if you form an LLC instead. If you hope to someday operate a major corporation instead of just a small business, give the corporation a look.
On the other side of the coin, the LLC is a better choice for small business owners who aren’t wealthy. This is because the corporate tax rate of 21% is higher than the bottom two individual tax brackets (10% and 12%), and basically dead even with the next two brackets (22% and 24%).
Given the advantages of the pass-through entity, the LLC can probably save you money on taxes if you and your co-owners each make less than $160,700 per year.
Since LLCs and corporations have a lot in common, it can be tricky to decide which type is right for your business. Ultimately, the choice boils down to the needs of your business.
An LLC is best if you prefer tax flexibility and simple maintenance, while the corporation is your go-to if you’d rather raise funds through investments, or if you’re a high-income individual who can take advantage of the corporate tax rate.