Entrepreneurship has been called the new American dream. Starting a new business starts with an idea that develops into a business plan, but not without careful financial and legal considerations. Among the decisions that new business owners grapple with is whether to form a limited liability company (LLC) or a corporation.
There are similarities and differences between LLCs and corporations that business owners should understand before choosing between these two entities. Examples are noted below.
Similarities between LLCs and Corporations
- Both entities are created by filing the paperwork with a State agency. Unlike a sole proprietorship or a general partnership, LLCs and corporations are not recognized under state law until the filing has been made.
- Both entities provide owners in some circumstances with limited liability, meaning your personal assets are protected from your business creditors’ claims.
- If an LLC, whether it is a single-member or multi-member LLC, makes no election to be taxed as an S-corporation, the LLC is still a pass-through tax entity, allowing business profits and losses to flow through and be reported on the owners’ personal tax returns. A corporation may be a pass-through tax entity, but to do so requires the shareholder(s) of the corporation to file with the IRS an election to be taxed as an S-corporation.
Differences between LLCs and Corporations
- Unlike LLCs, which can have an unlimited number and type of owners, if a corporation elects to be taxed as an S-corporation it becomes subject to strict ownership rules. An S-corporation can have no more than 100 shareholders, may not have non-U.S. citizens as shareholders, and cannot be owned by corporations, LLCs, partnerships, or certain types of trusts.
- As opposed to an LLC with flexibility in structuring the economic arrangement among its owners, corporations that have elected to be taxed as S-corporations cannot issue classes of stock with different economic rights, but can issue voting and non-voting classes of stock.
- Corporations are subject to minimum but mandatory requirements on how the entity is managed. For example, corporations under a state’s law may have to adopt bylaws, issue stock, hold regular meetings, and maintain meeting minutes with the corporate records. LLCs are not subject to these requirements, but from a management viewpoint keeping up-to-date business records should be routine, whether the business is owned by an LLC or a corporation.
- With a corporation taxed as an S-corporation, the owners must share profits based on each owner’s percentage of ownership. LLC owners have wide latitude and flexibility in how profits and losses are distributed, i.e. in almost any manner that is agreed upon.
- LLCs under Florida law generally provide enhanced asset protection IF there are two or more members of an LLC, as compared to a corporation.
While the LLC is often the optimal vehicle for a small business, each business has its own set of circumstance to consider. While tax planning is vitally important, there are other decisions to be made whether you have just started a business or you want to assess the circumstances of the business you have been operating for years. Don’t go it alone.