LLC vs. Corporation: The Pros and Cons You Need To Know
When setting up an organizational structure for businesses in the US, many business owners find themselves deciding which of the two options - LLC and Corporation is best for their company.
Setting up a business structure in consideration of tax, profit sharing and legal decisions are great but the best choices are made with distinct knowledge of both legal structures.
In this article, we will see the pros and cons of the Limited Liability Company and Corporation, which will enhance your decision-making in setting up the best structure for your organization.
What is a Limited Liability Company?
A Limited Liability Company is the recognized term for a Private Limited Company in the United States. It is a business entity that combines elements of corporations and partnerships. The limited liability status of corporations gives firms the luxury to enjoy the flexibility and flow-through taxation of sole proprietorships and partnerships.
LLCs are quite different from corporations but similar to partnerships. For instance, one can elect not to be directly taxed, instead, each member of the LLC can report earnings and losses on their tax returns; this is often referred to as a "pass-through" arrangement since the profits and losses are passed through to the members. The benefit of this legal structure is that, unlike stockholders of a corporation, who may pay taxes both once as individuals and again at the corporate level when they receive profits, members of an LLC are only taxed once.
In contrast, an LLC differs from a partnership in that its personal and commercial assets are kept separate.
Types of LLCs
In choosing the best business structure for your organization, these are the types of LLCs you may like to consider depending on your industry or business goals.
Single Member LLCs
These are the most common types of LLCs which are similar to sole proprietorships. They are comprised of a single owner with no employees and they are generally treated as a disregarded entity. Owners of single-member LLCs are encouraged to keep their personal and business assets separate from tax.
Multiple Member LLCs
Multiple Member LLCs are simply LLCs with one or more partners. Each partners have a share percentage in the company as well as incurring debts and taxes depending on their investment.
In Multiple-member LLCs, multiple owners are treated as business partners and each has obligations in the company.
Member-Managed LLCs
These are LLCs that are quite common in the United States, they are usually managed by owners or members. These legal entities give their members total control over crucial decisions and day-to-day business activities.
The operating agreement's share percentages for each member, however, will determine who has the final say.
Manager-Managed LLCs
These LLCs are managers selected and chosen by owners or members. The managers have the right to make crucial decisions in the company without obtaining permission from the owners.
Managers can be owners but owners do not necessarily have to be managers which is why managers can be selected from a third party.
Professional Limited Liability Company (PLLC)
These are LLCs for professionally licensed structures such as Accountants, Lawyers, physicians, and Engineers.
In all States that mandate PLLCs, notification, and approval of the State regulating board for that profession are required. When a licensed member passes away, loses their license, or decides to leave the PLLC, problems can occur. Sometimes it is necessary to disband the company and maybe start over. State-level restrictions may also apply to the transfer of ownership in a transaction.
What are the Pros of LLCs?
Here are the advantages of LLC.
Limited Liability Protection
This is quite similar to the corporation as owners are protected against personal liability for the company’s debts and legal obligations. Limited liability protection is not available for sole proprietorships or partnerships.
Although Limited Liability has its limit, if owners continue to incur debts or take any action that breaches LLCs’ corporate agreement, they may lose the limited liability protection.
Taxation
LLCs provide flexible tax options for their owners. LLCs are by default subject to "pass-through taxation," which entails that each member's tax return receives a pass-through of the LLC's gains and losses, with the member's tax rate applied.
LLC owners can be paid as company employees, take part in benefit plans offered by the company, and possibly even save money on taxes thanks to corporate taxation.
Profit Sharing Flexibility
The flexibility of LLC is that members enjoy the advantage of determining the percentage of profits to be shared. Oftentimes, dividends are paid on stock based on the quantity of shares held, and partnerships often divide profits among members but, an LLC has the option to decide whether to share, not share, or distribute its profits in another way.
Management Flexibility
Member Managed LLCs enable every owner to participate in daily decision-making for the company. Alternatively, the company can be managed by qualified managers who are either internal or external. This is beneficial for members who wish to appoint somebody with greater business management experience
What are the Cons of LLCs?
Here are the disadvantages of LLC.
LLC Cost
The cost of hiring an attorney during the process of establishing an LLC can be expensive. Formation of an LLC may also require large filing costs as well as publishing a letter of intent depending on the city.
Difficulty in Ownership Transfer
Limited Liability Company is structured in such a way that the death of the owner or close of business may pose difficulty in the transfer of ownership or assets.
In the transfer of ownership, LLCs require the approval of all members for changes to the ownership proportion or the admission of new members.
What is a Corporation?
A corporation is a legal entity that provides limited liability for shareholders or stockholders. In this business structure, management is vital and more strict than LLC. The shareholders who are regarded as the owners of the company must establish a formal structure called the Board of Directors.
The Board of Directors is responsible for delegating responsibilities and obligations to corporate officers.
Corporations possess the same rights as individuals or sole proprietorships as they can enter into contracts, obtain loans, hire employees, own assets, pay taxes, sue, and be sued. The formation of a Corporation is called Incorporation. This incorporation is carried out by shareholders who share the same goals with ownership of their stock shares.
What are the Pros of Corporations?
Here are the advantages of corporations.
Tax Benefits
Shareholders may receive tax-free benefits, such as retirement plans and insurance, and the corporation can deduct employee and officer benefits. Self-employment tax applies to any income designated as owner salary; the remaining business dividends are taxed at the individual level.
Limited Liability Protection
Shareholders enjoy limited liability protection, which implies that shareholders are not to be held accountable in the case of lawsuits or debts.
Personal liability protection influences business owners to incorporate their businesses.
Good Credibility
Incorporating your business will grant you good credibility in the presence of investors and also give your business an edge in securing loans.
It is great for both expanding a company and preventing a corporation from going bankrupt during difficult times.
Business Longevity
Unlike a sole proprietorship, corporate businesses may last a lifetime, especially in the case of the death of the owner. If shareholders choose to sell the company, the operation of the business continues.
What are the Cons of Corporations?
Here are the disadvantages of a corporation.
Double Taxation
Taxes are levied by corporations on profits that are given to shareholders. Taxes are regulated in the two types of corporations which include C-Corps and S-corps.
In the C-corps, owners pay tax on dividends received as an entity and shareholders while in S-corps, taxes are imposed on shareholders' income.
Corporate Formalities and Structure
In a Corporation, the application process can be lengthy. It may require time and energy for activities such as record keeping, proper documentation, and regular annual meetings among shareholders to completely adhere to the legal requirements.
LLC vs Corporation: What are the differences?
Conclusion
Both Limited Liability Companies and Corporations are great, especially for businesses and organizations in the United States and the UK. Study your business and its industry and read the above documents to help make affirmed decisions when choosing the legal structure that best fits your company. Begin your journey of establishing a legal structure for your business with Foundeck.
