A Brief Overview of the Differences Between Corporations and LLCs

July 22, 2019
Drucker & Mattia PLLC

If you’re planning on starting your business, choosing the right business entity is essential. There are several options, including sole proprietorships, LLCs, and corporations. Many choose to go to the LLC or corporation route. While there are several key similarities between these business options, there are also several major differences that may help you make your final decision.

Ownership

The primary difference dividing LLCs and corporations is the issue of ownership. An LLC is owned by individuals who have made a contribution to the business, while a corporation is owned by those who obtain shares in the company. LLC owners have owners’ equity, while corporation owners are shareholders.

How the Business Is Established

LLCs and corporations differ in how they are established. When one or more owners decide to create an LLC, they file articles of organization to set up the business. From there, they write an operating agreement that outlines how the company’s daily affairs and management needs will be handled. At this stage, the owners also decide how much each individual owns.

On the other hand, those creating a corporation must file corporate organization documents. The company must also have a board of directors. The board oversees the company’s operations, holds owners accountable, and weighs in on business decisions. The board must also agree on bylaws.

How Profits and Losses Are Handled

A company’s profits and losses are handled differently depending on the business structure. When a corporation earns profits or loses money, those gains and losses are owned by the corporate entity. The corporation can keep some earnings and payout the rest as dividends to shareholders. An LLC’s profits and losses pass through to the owners.

Taxation

Taxation is a key factor for many new business owners as they compare entity options. Corporations are considered separate entities for taxation purposes, so they are taxed at the corporate rate. Income from an LLC is taxed based on each individual’s income and tax level. Furthermore, LLC owners must pay the self-employment tax on the income they take in from the company. Corporate owners aren’t considered self-employed, so they are not subject to this tax.

Note that this is a complicated topic with a number of exceptions and factors that affect how much you actually pay in taxes. For example, in some situations, a business owner can form an LLC and have it taxed as a corporation. It’s important to discuss your options with a business attorney to decide which option best suits your needs and goals.

Your choice of business entity can significantly affect your company’s day-to-day operations, your personal earnings, and your tax obligations. To discuss your needs with a business attorney, contact Drucker & Mattia, PLLC to set up a free consultation.

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