When starting a business, a business owner must first choose which type of entity to create. Two of the most popular entity types are the limited liability company (LLC) and the corporation. Choosing between these two types of entities can be difficult for business owners who are not familiar with the unique features of each type. To choose the right one for your business, know their similarities and differences.
LLCs and corporations are legal business structures, meaning they are ways to legally organize a business under a state’s law. Both of these legal structures provide limited liability. Limited liability means that a person or entity’s legal, and therefore financial, liability is limited. Owners are protected more under limited liability structures because they are not personally liable for the business’s liabilities or debts, although there are exceptions.
The objective of choosing an entity that provides limited liability is to protect business owners’ personal assets from being reached in lawsuits against the business or by the business’ creditors. LLCs and corporations both require documentation to be filed with the state government at the time of formation. A fee to register the business entity must accompany the filing.
Despite significant similarities, LLCs and corporations also have several distinguishing characteristics. The LLC is a newer entity structure and provides more flexibility than the corporation. However, LLCs often mimic corporations in their planning and legal documentation. Here are some of the key differences between these two entities:
- Naming Requirements. This is a small but significant distinction between corporations and LLCs. Under Florida law, the name of an LLC must end with the words “limited liability company”, or the abbreviation LLC or L.L.C. In Florida, the name of a corporation must contain the word “corporation,” “company,” or “incorporated,” or the abbreviation “Corp.,” “Inc.,” or “Co.,” or the designation “Corp,” “Inc,” or “Co”. This distinction is important because your entity filing application may be rejected if you violate these naming requirements. Use care to ensure your application is not disqualified due to what may seem to be a minor mistake.
- Ownership Structure. LLCs and corporations have different ownership structures. The owner of an LLC is typically called a member, and ownership interests can be defined by units (similar to shares of corporate stock) or by percentage. State law, the law under which the LLC was established and the members’ operating agreement are key factors in how LLC members define ownership. Unlike a corporation, ownership interests in an LLC need not reflect a member’s contribution of money or property to the LLC. Where there are fewer owners, and there are fewer limitations as to how ownership interests are distributed, members may also opt to describe ownership in percentages. The owner of a corporation is called a shareholder or stockholder, and the units of ownership are called shares or stocks. The structure of the corporation transfers easily by dividing ownership into these units. LLCs with ownership interests consisting of units borrow this structure from corporation law, reflecting the LLC’s flexible nature.
- Management. LLCs and corporations also diverge in their management. LLCs typically take one of two basic structures: member-managed or manager-managed. In member-managed LLCs, the members manage the LLC. In manager-managed LLCs, one or more managers have the authority to decide for the entity. In manager-managed LLCs, unless otherwise dictated in the operating agreement or company formation documents, a member of the LLC can serve as a manager. An LLC’s operating agreement may even require that managers of the LLC be members. In corporations, by default, a board of directors has management authority. The board is answerable to the shareholders and is charged with the day-to-day management functions. The members of an LLC also have the flexibility to create a board of managers similar to a corporation’s board of directors, but it is not an LLC requirement.
- Taxes. A major area of distinction between corporations and LLCs is the tax structure. An LLC, unless it elects to be taxed as an S-corporation, enjoys pass-through taxation. This means the LLC entity is not taxed; rather, the taxes flow through to the members/owners of the LLC and there is no double taxation. C-corporations are subject to double taxation. This means the corporate entity must pay taxes on corporate income, and the corporation’s shareholders must also pay taxes on the dividends they receive.
- Maintenance. To maintain their legal status, both of these entity types require maintenance; however, the complexity of this maintenance differs. In most jurisdictions, including Florida, LLCs and corporations must file an annual report, and pay a fee at the time of filing the report, to continue to operate as an LLC or corporation. A corporation requires annual meetings of shareholders and the board of directors. An LLC is not required to adhere to annual meetings unless the LLC’s operating agreement requires that level of formality.
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Choosing between these two legal entities requires careful consideration and depends upon your unique business needs and goals. To weigh the risks and benefits of each business type, please contact us at (813) 852-6500 to schedule a courtesy, initial discussion to see what is best for you. Our attorneys are ready and available to provide the analysis you will need to make the best decision for you and your business.