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Corporation vs Limited Liability Corporation

Below is a table which lists the major differences between corporations and limited liability corporations.

C Corporation S Corporation LLC

Business income
taxed separately.

Tax on business income is paid on owner’s personal tax return. Tax on business income is paid on owner’s personal tax return.
Annual meeting
Annual meeting
Annual meeting
not required.
Issues shares
of stock.
Issues shares
of stock.
No stock.

For more on corporations, see below. For more on limited liability corporations, see below. To form a corporation or limited liability corporation, click here.


Separate Legal Entity Status
A corporation is a separate legal entity existing under authority granted by state law. It has its own identity separate and apart from its shareholders/owners.

Broad Range of Powers
As a separate legal entity, a corporation has the power to act in any way permitted by law and by its own corporate charter. For example, a corporation can enter into contracts, buy and sell both real and personal property, sue and be sued, and can even be responsible for breaking the law (i.e. committing a crime).

Small Claims Court
In most jurisdictions, any officer or director or employee can appear in small claims court on behalf of the corporation.

Separate Liability for Corporate Debts
As a separate legal entity, a corporation is responsible for its own debts. Normally, shareholders, directors, and officers are not responsible for corporate liabilities. If the corporation suffers losses, the corporation itself must bear those losses to the extent of its own resources, and not the personal assets of the individual shareholders. In effect, however, shareholders indirectly bear these losses by a decline in the value of the stock they hold in the corporation.

Note however, that shareholders, directors, and/or officers may be held liable for the debts of the corporation where the court imposes “alter-ego liability” or where the individual has personally guaranteed the corporate debt.

Perpetual Duration
A corporation is capable of continuing indefinitely. Its existence is not affected by the death or incapacity of shareholders, directors, or officers of the corporation.

Duration of Corporation Compared to LLC An LLC has a limited existence. Absent a contrary agreement, a limited liability company (LLC) is dissolved upon the death, withdrawal, or bankruptcy of a member unless the business is continued by unanimous vote of the remaining members. Although the operating agreement can be drafted to avoid such a result, the life of the LLC is still limited to the termination date in the Articles of Organization.

The Disadvantages of Incorporating
Corporate Formalities A corporation can be created only by compliance with General Corporation Law of the state of incorporation. This usually requires filing of Articles of Incorporation with the appropriate state entity (usually the Secretary of State) and payment of the requisite state fees and taxes.

A corporation is required to have a board of directors, corporate officers, annual shareholders meetings, and to maintain separate books and records. Failure to observe such formalities may result in the personal liability of shareholders for corporate debts. However, where the corporation has only one shareholder, many states allow that one shareholder to act as director and all officers (President, Secretary, and Treasurer).

Regular Corporation Advantages

 Shareholders (the owners) enjoy personal limited liability.
 It is generally easier to obtain business capital than with other legal structures.
 Profits may be divided among owners and the corporation in order to reduce taxes by taking advantage of lower tax rates.
 The corporation does not dissolve upon the death of a stockholder (owner) or if ownership changes.
 Favorable tax treatment for employee fringe benefits including medical, disability, and life insurance plans.
 70% of any dividends received by the corporation from stock investments are deductible (unless you purchased the stock with borrowed money).

Regular Corporation Disadvantages

 More expensive and complex to set up than other legal structures.
 Completing tax returns usually requires the help of an accountant.
 Double taxation on profits paid to owners (corporation pays corporate taxes on profits and owner pays personal taxes on dividends from the corporation).
 Recurring annual corporate fees.
 Tax rates are higher than individual rates for profits greater than approximately $75,000.
 28% accumulated earnings tax on profits in excess of $250,000.
 Business losses are not deductible by the corporation.

S-Corporation Advantages

 Owners enjoy personal limited liability as in a regular corporation.
 No Federal income tax liability, and in most cases, no state income tax.
 Profit/losses are passed to owners … no double taxation.
 The S-corporation does not dissolve if one of the owners dies or otherwise leaves (like a regular corporation).
 Wholly owned subsidiaries are permitted.

S-corporation Disadvantages

 Assistance is required to set up.
 Maximum of 75 shareholders.
 Only one class of common stock is permitted (no preferred stock)

Limited Liability Corporations (LLC)

A Limited Liability Company has the advantage of being a hybrid between a partnership and a Corporation. The advantage of a Limited Liability Company is that most states require fewer formalities be observed in an LLC in comparison to a corporation.

This type of corporation blends the tax advantages of a partnership and the limited liability advantages of a corporation. Owners of an LLC are referred to as “members.” As you might expect, it also has some limitations but is definitely worth considering.

Advantage: One LLC Member Required. Historically, most states require that a Limited Liability Company be comprised of at least two LLC members. Today most states and the IRS recognize the single-member LLC as a legitimate business structure.

Separate Legal Entity Like limited partnerships and corporations, the Limited Liability Company shares a similar advantage — it is recognized as a separate legal entity from its “members.”

Limited Liability Ordinarily, only the LLC is responsible for the company’s debts thus shielding the members from individual liability. However, there are some exceptions where individual members may be held liable:

  • Guarantor Liability: Where an LLC member has personally guaranteed the obligations of the LLC, he or she will be liable. For example, where an LLC is relatively new and has no credit history, a prospective landlord about to lease office space to the LLC will most likely require a personal guarantee from the LLC members before executing such a lease.
  • Alter Ego Liability: Very similar to the judicial doctrine applied to corporations where a court may hold the individual shareholders liable where the business entity is merely the “Alter Ego” of its shareholders, a member of an LLC may also be held liable for the LLCs debts if the court imposes its “alter ego liability” doctrine.Please note, however, that although a corporation’s failure to hold shareholder or director meetings may subject the corporation to alter ego liability, this is not the case for LLCs in California. An LLC’s failure to hold meetings of members or managers is not usually considered grounds for imposing the alter ego doctrine where the LLCs Articles of Organization or Operating Agreement do not expressly require such meetings.

LLC Management and Control Management and control of an LLC is vested with its members unless the Limited Liability Company’s articles of organization provide otherwise.

Voting Interest Ordinarily, voting interest in an LLC directly corresponds to interest in profits, unless the articles of organization or operating agreement provide otherwise

Transferability No one can become a member of an LLC (either by transfer of an existing membership or the issuance of a new one) without the consent of members having a majority in interest (excluding the person acquiring the membership interest) unless the articles of organization provide otherwise.

Duration An LLC does not have a reliable continuity of existence. The articles of organization must specify the date on which the Limited Liability Company’s existence will terminate. Unless otherwise provided in the articles of organization or a written operating agreement, an LLC is dissolved at the death, withdrawal, resignation, expulsion, or bankruptcy of a member (unless within 90 days a majority in both the profits and capital interests vote to continue the LLC)

Advantage: Formalities. The existence of an LLC begins upon the filing of the Articles of Organization with the Secretary of State. The articles must be on the form prescribed by the Secretary of State. Among the required information on the form is the latest date at which the LLC is to dissolve and a statement as to whether the LLC will be managed by one manager, more than one manager, or the members.

To validly complete the formation of the LLC, members must enter into an Operating Agreement. This Operating Agreement may come into existence either before or after the filing of the Articles of Organization and may be either oral or in writing.LLC Meetings

While many states do not require that your Limited Liability Company hold meetings on a regularly scheduled basis, it’s always wise to conduct meetings with your members to ensure the LLC is in agreement in all its endeavors.

Opening a Bank Account

Most banks require only a copy of your Articles of Organization and your federal Employer ID Number to open a bank account. Some, however, may also require a resolution passed by the Limited Liability Company’s members and a copy of the LLC Operating Agreement before opening an account. To better determine your bank’s requirements, you should contact the branch manager and ask about their requirements for New Accounts.

LLC Advantages

 Limited personal liability for the owners (like a corporation and unlike a partnership).

 No Federal taxes (like a partnership).

 No limit on the number of stockholders (unlike an S-corporation).

 More than one class of stock is permitted (unlike an S-corporation).

 Business losses may be deducted on your personal tax return (like a S-corporation).

LLC Disadvantages

  Legal assistance is required to set up. The paperwork is complex.

 No “continuity of life” as in a regular corporation. The LLC dissolves if one of the owners dies or otherwise leaves. However, other formal agreements between the owners can overcome this.

 Some states require than an LLC have more than one member.

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