What's the Difference Between an LLC and a Corporation?
August 20, 2022
If you're planning to open a company in the United States, you need to identify the most convenient commercial structure in relation to your business plan. You'll find multiple business options in the U.S., each of them with their own traits and some offering more management flexibility than others. All these categories vary depending on the company's commercial goals and the partners/shareholders involved.
Limited Liability Companies or LLCs represent the most popular business approach in the U.S. thanks to their administrative flexibility. You also have the Corporations managing a hierarchy-based administration between partners or shareholders. Today, we will explain the differences between an LLC and a Corporation so you can choose the commercial structure that best suits your business project in the U.S.
What Is an LLC?
According to the Internal Revenue Service (IRS)
, an LLC in the U.S.
has a limited business structure when it comes to federal statutes, each state has its own set of regulations that partners and entrepreneurs must verify before starting an LLC. The owners of this business structure are called members. Depending on the state where the LLC was created, members may be able to include more individuals, other LLCs, anonymous companies, or even foreign companies as part of their partnership since there are no limitations regarding the number of members these companies can have.
On a related note, LLCs have a flexible structure that combines traits of a corporation and a limited partnership. This mix allows the administration by the hand of one or more members/shareholders without ever placing any personal responsibility on them concerning the impositions attached to an American company. All earnings generated by an LLC are transferred to each member, and members register said earnings as personal income on their individual tax returns. They are not obligated to pay for the company's income taxes, since it doesn't retain the amount; the owners or members are the ones who make the payments in their personal taxes.
What Is a Corporation?
Corporations are businesses that base their structure on a hierarchy between owners, shareholders, and board of directors. All the management is regulated by the board's guidelines, and its members name the executives who will take care of the corporation's financial, operational, and commercial branches. These structures are bound by federal and state taxes, so they need to file both individual and corporate tax returns, depending on the subcategory under which the corporation was listed upon registration.
What's the Difference Between an LLC and a Corporation?
An LLC differs from a Corporation in many ways, so let's go over the most important factors:
- Business Creation: LLCs and Corporations are created by following different steps. LLCs are formed by filing articles of organization with the secretary of state's office. This is followed by a contract or agreement that will define the company's management and operations. This agreement also displays the members' percentage of participation.
Corporations file articles of incorporation to determine the corporation's nature and purpose. This also entails the creation of a Board of Directors that's chosen via a vote by all members or partners, executives, and their hierarchy in relation to the company's operational, commercial, and financial administration.
- Business Ownership: Each commercial structure is ruled by an ownership, whether it comes from the owner's administration of an LLC or a Corporation's management. Either way, LLC owners have an active participation in the company's earnings due to their shareholder status. Corporations, on the other hand, have the participation of executives and board members.
- Taxes: As mentioned earlier, LLCs aren't obligated to pay income taxes since the earnings are divided between members who, in turn, pay for them when they file their individual taxes. By contrast, corporations must pay for business taxes as shareholders list their earnings on their individual taxes.
- Income Distribution and Bankruptcy: This is an important factor for business owners and entrepreneurs as the proceedings for LLCs and corporations are vastly different when it comes to income distribution and bankruptcy. For LLCs, earnings are distributed among members and owners, and they have no personal responsibility over debt or liability incurred by the business. If the company becomes the subject of a lawsuit, members would not be directly affected because the lawsuit would only affect the company's shares and goods.
In a corporation, earnings are divided according to the shareholding percentage and the executives hierarchy within the directive board. This means that owners don't get these earnings directly; they go to the Board of Directors and, in the event of bankruptcy, losses would also be managed on a corporate level.
Get the Most Knowledgeable Counsel To Make the Best Business Decision
The authorized agents at United Tax & Accounting Group are ready to provide the best business consultation services in the United States. We have ample experience when it comes to accounting services, business creation, business accounting, and tax planning/preparation. We offer the most qualified business consulting services to help you make your financial goals a reality in the U.S.
We also count on the latest technology and the expertise of outstanding specialists to ensure the best tax and accounting services. You can keep all your accounting information in order and file your company's records on schedule when the tax season rolls around.
Whether you're more at ease with an LLC or a corporation, you can count on our business consultants to help you make the best decision for your company. You can call (786) 431-5576
or fill out the contact
form on our website to ask about any of our professional services. You can also make any request via our online chat, and we'll clear out all your doubts regarding business management, accounting, and tax planning. Our team will be happy to assist you and your company.