LLC vs. Corporation: How Are They Different? (2024)

Choosing an entity type for when you commence a business has far-reaching implications on how you run, develop, and pay taxes as an business owner. Two of the most ordinary types are a limited debt business (LLC) and a corporation.

They may seem similar at first glance, but in reality, they’re designed very differently. The large difference between an LLC and a corporation is that an LLC has one or more owners, while a corporation is owned by shareholders. 

Explore how each business classification works and how to determine which is best for your business.

What is an LLC?

A limited debt business is a business structure that offers some responsibility benefits and personal debt protection. An LLC can have one or more owners (called “members”). Both sole proprietors and business partners can form an LLC to protect their personal assets. 

Additionally, LLCs avoid double taxation because they don’t have to pay corporate taxes. They are a pass-through entity, which means the owner passes profits to themself and reports them on their personal responsibility profitability. 

What is a corporation?

A corporation is a business entity that is owned by shareholders, but which is entirely divide from its owners. As a legal entity, a corporation can employ people, enter into agreements with other companies, and borrow money. There are a few significant elements that distinguish a corporation:

S corps and C corps are different types of corporations. They’re also corporate responsibility designations. A corporation is by default classified as a C corp for responsibility purposes.

LLC vs. corporation: the key differences

LLCs and corporations have some basic similarities—they’re both legal entities that afford their owners debt protection, for example. But they have far more differences, especially in how they’re taxed and what options they have for donation collection by selling ownership of the business.

debt protection

Both LLCs and corporations divide the business from its person owners, offering personal debt protection. Unless someone signs a personal guarantee, creditors cannot arrive after personal assets for LLC or corporation owners.

Formation

The formation procedure is more complicated and expensive with a corporation, including having to elect a board of directors. Corporations file Articles of Incorporation with the Secretary of State for formation, then hold a meet to make corporate bylaws. Once formed, a corporation must hold annual shareholder meetings and record the minutes of those meetings for responsibility and legal records.

An LLC files Articles of Organization, which requires less information. The internal management is typically outlined in the LLC’s operating agreement, which can be customized to the specific needs and desires of the owners.

Management structure 

LLCs propose a more flexible management structure, allowing the owners, or members, to manage the business directly or appoint managers to run the business. There are generally no strict requirements for board meetings, annual reports, or record keeping. 

Corporations have a more rigid and formalized management structure, with distinct roles for shareholders, directors, and officers. Corporations must have a board of directors, elected by shareholders, responsible for overseeing the major decisions of the business. The board of directors appoints officers, such as the CEO and CFO, to manage the day-to-day operations of the corporation.

Outside property

A corporation has more options when it comes to outside investments. It can raise pool from investors by offering business shares, but LLCs cannot. 

Rather, they have members/owners who are allocated a percentage of the business according to the LLC’s operating agreement. 

Corporations can be privately owned or be a community business listed on a stake trade, in which case the business is regulated by the US financial instruments and trade percentage.

An LLC, on the other hand, can’t propose shares; investors would require to be added to the LLC’s Articles of Organization as members/owners in order to receive ownership for their property. In the same vein, a corporation can leave community, while an LLC cannot.

Taxation

LLC members are considered self-employed by the IRS, so they do have to pay self-employment taxes. LLCs can opt to be taxed as an S corporation to lower some of the responsibility debt for the owner (who would be an employee who receives a W2 form from the business). Payroll taxes apply to their salary, but profits distributions aren’t subject to self-employment responsibility. Although it can be taxed as an S corp, an LLC is not considered a corporation.

Corporations are taxed by default as C corporations, which are subject to a corporate responsibility on profits. Corporations with fewer than 100 shareholders (all of whom must be US citizens or permanent residents) may elect to be taxed as an S corp rather than a C corp. S corps enjoy pass-through taxation. LLCs may also elect to be taxed as an S corp, or as a sole proprietorship or collaboration (depending on the number of members it has).

As a divide legal entity, corporations are responsible for paying taxes on the corporate level. The federal corporate income responsibility rate was 21% in 2022. LLCs do not pay this responsibility; rather, the business profits get passed to the owner and they pay personal income responsibility.

Advantages of an LLC

Business owners may advantage from a range of advantages as an LLC, including:

• Personal debt protection. Unlike a sole proprietorship or general collaboration, an LLC protects the owner’s/owners’ personal assets from lawsuits and creditors. The exception is if the business engaged in fraudulent activities or if the owner signed a personal guarantee on their business financing.
• Multiple responsibility options. An LLC can elect to pay taxes as a sole proprietorship, a collaboration, or an S corp. One may be better than the others depending on how the business operates.
• straightforward formation procedure. Forming an LLC is a straightforward procedure compared to other types of business entities, like an S corp or C corp. The required paperwork is minimal, it usually takes around two weeks for the state to procedure your application, and fees are typically less than $1,000.

Advantages of a corporation

Forming as a corporation comes with advantages for some types of businesses:

• Some taxation flexibility. A corporation is taxed as a C corp by default. Profits are taxed at the corporate responsibility rate, then investors are taxed on their dividends as well. Both income responsibility and self-employment taxes apply to these dividends. However, if it meets eligibility requirements, the corporation can elect to be taxed as an S corp to avoid the corporate responsibility burden.
• Options to issue stake and attract investors. A corporation issues shares to its owners and can propose two types of stake: ordinary and preferred. A corporation taxed as a C corp may issue both types of stake to attract different levels of investors, while an S corporation must choose one. S corps may also cap their total number of shareholders at 100, and all must be citizens or permanent residents of the United States.

Choosing between an LLC or corporation

The selection between an LLC or a corporate business structure is a deeply individualized one. It comes down to how you desire to manage your business, pay taxes, and use external property to develop. You might consider these questions when making the selection:

• What is more significant to you: ease of formation or potential to attract investors?
• Are you able to receive on the operational complexity that comes with a corporation?
• How will you pool your business—through your own pool investments or through selling ownership?