Corporation vs. LLC

Understanding the difference between Corporation and LLC

Starting a business with partners and legally registering the company in the country where you will have your base of operations requires that you make some important decisions. One of the important decisions that you will have to make is related to the structure of the company that you want to set up. The advantage to taking this step is that you can choose a structure that is as close as possible to the manner in which you want to operate the business.  First, though, it is essential that you know the types of business structures that are acceptable under the company incorporation act of the country and the rules and regulations that are associated with the process.

The factors that you have to consider when you choose the structure of the business are:

  • Legal liability
  • The tax that applies to the business
  • How to protect your assets
  • The costs of operating the business

What is an LLC?

LLC stands for limited liability company and it is an entity in which the owners or the shareholders all share limited liability or responsibility for the debts and losses of the company. Usually, the shareholders are liable for the face value of the shares when they are paid in full. In this way, their personal assets are not at stake and cannot be seized for repayment of loans or other business debts. The only way they can be personally held liable for any debts is if they signed a personal guarantee for them.

The structure of an LLC has some aspects of a corporation and some aspects of a partnership, but it is not either one. The owners are known as members and there can be an unlimited number of members.  Individuals, corporations and even other LLC’s can be members of an LLC.

The profits and losses of an LLC passes to the members depending on how many shares each one owns. Each member then pays tax on the profit on the personal income tax return and this is based on the adjusted gross income of the owners. The members draw up an operating agreement at the outset and they abide by that agreement.

What is a corporation?

A corporation has a publicly registered charter that recognizes that it is a formal business. It is a separate legal entity with its own privileges. The liabilities of the corporation are distinct from those of its shareholders. Some of the rights and privileges that a corporation enjoys include:

  • The right to borrow money
  • The right to enter into contracts
  • The right to lend money
  • The right to sue
  • The right to hire employees
  • The right to own assets.

As part of these rights and privileges, a corporation has to pay taxes and can also be sued.

There is an appointed Board of Directors and these people oversee the operation of the business. The shareholders do not have to pay taxes on the profits that they make, but rather the corporation is taxed at corporate rates. The shareholders do share in the profits either through dividends or stock.

Summary

A corporation is a legal entity in which the owners/shareholders are not held responsible for any business debts or losses. A Board of Directors is appointed to oversee the operations and to make the corporate decisions. The corporation is taxed at the corporate rate.

In an LLC, there are members rather than shareholders and they operate according to an agreement that they draw up. Members share in the profits and pay the tax on their individual income tax returns. The members also have limited liability for the business debts.