Corporation vs. Limited Liability Company (LLC)
Choosing a business structure is an important step when starting your business. The two main types of company structures are corporations and limited liability companies. Each type of company formation has specific requirements and liabilities which is why we recommend that you consult an attorney and/or tax professional when determining the best business structure for your new company. In order to better determine which choice is the right fit for your needs, take a look at the information below for the differences between corporations and limited liability companies.
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General Corporation
A corporation is a business organization that is a separate legal entity from its shareholders/stockholders, board of directors, officers, and employees. As its own entity, a corporation is liable for its own debts and obligations, it can sue and be sued, and it can be fined for violating the law. The corporation as a legal entity is created by filing Articles of Incorporation with the Secretary of State in the appropriate state jurisdiction. A corporation can become authorized to do business in other states by filing foreign qualification or registration documents.
If you will be forming a corporation, you will need to understand that the company’s formation, operation, and maintenance are governed by the statutes of the state of incorporation, often called the home state or domestic state. The corporation is subject to annual requirements in the domestic state and in each foreign state in which the company is qualified to do business. These annual filings will keep the company in compliance (good standing) with the Secretary of State’s office. State law also governs the internal operations of the company in that corporations are required to hold annual board member/shareholder meetings and maintain bylaws and meeting minutes. While these records do not need to be filed with the Secretary of State, they are key to the internal maintenance and governance of the company. Corporations may also be subject to federal, franchise, or other taxes.
There are different types of corporations you might consider with an attorney and/or tax professional, which include a Closed Corporation, an S-Corporation, a Professional Corporation, a Non-Profit Corporation, and a Benefit Corporation.
Limited Liability Company
The limited liability company shares many of the characteristics of the corporation and of partnerships. A partnership is a business structure where each owner is jointly and severally liable for all aspects of the company. In a limited liability company, its owners, which are known as members, are granted an interest in the limited liability company and are a party to a contract, usually referred to as the Operating Agreement. This contract sets forth the rights and duties of the members. The members are separate from the company as a legal entity, and as its name implies, the members enjoy limited liability. However, the entity is taxed similar to a partnership, where each member must report income or loss on their personal income tax return and pay tax at the individual income tax rate.
The limited liability company is created by filing Articles of Organization with the Secretary of State in the appropriate state jurisdiction. If the limited liability company will be doing business in other states, foreign registration documents must be filed in each state. A limited liability company may also be required to file annual reports in each state that the company is registered to transact business. The legal requirements for company meetings are much less formal than requirements for corporations. Many state statutes allow for limited liability companies to operate according to the entity’s own operating agreement, while general guidelines are provided in state statutes.
Corporation vs. LLC
An important difference between a corporation and a limited liability company is the way in which these entities are taxed. The corporation is taxed on its own profits when earned, and the shareholders are taxed on their profit when distributed as dividends, resulting in most cases in double taxation. A limited liability company employs a pass-through tax system, where members are taxed on the profits of the company, but the business itself does not pay taxes as a separate entity. A limited liability company may elect to be treated as a corporation for tax purposes, while still enjoying the other aspects of this type of entity structure.
Another major difference between the two company structures is how the company raises capital. A corporation will issue stock at a set par value in order to increase capital. There are two classes of stock, common stock and preferred stock, and either class can be issued. Interest in stock can easily be transferred from person to person. A limited liability company does not issue stock. Rather, the members each hold an interest in the company according to the terms of the operating agreement. Since the interest is subject to those terms, it may be difficult to transfer interest in the company to another person.
| CORPORATION | LIMITED LIABILITY COMPANY | |
|---|---|---|
| Domestic State Formation | Articles of Incorporation | Articles of Organization |
| Foreign State Formation | Foreign Qualification | Foreign Registration |
| Existence | Perpetual unless otherwise specified | Perpetual unless otherwise specified |
| Management | Managed by director(s) and officer(s) | Managed by member(s) or manager(s) |
| Meeting Requirements | Board of directors, formal meetings, minutes and annual State reports are required | Less formal meetings and minutes are required than for corporations |
| Raising Capital | Shares of stock are usually sold to raise capital | Potential to sell interests, contingent upon operating agreement restrictions |
| Transferability | Shares of stock are transferred with ease | Contingent upon operating agreement restrictions |
| Taxation | Taxed at the entity level and Shareholders receiving dividends are taxed at the individual level | Not taxed at entity level if properly structured. Profit/loss is passed through directly to the Members |
Corporation vs LLC Comparison Chart
| CORPORATION | LIMITED LIABILITY COMPANY | |
|---|---|---|
| Domestic State Formation | Articles of Incorporation | Articles of Organization |
| Foreign State Formation | Foreign Qualification | Foreign Registration |
| Existence | Perpetual unless otherwise specified | Perpetual unless otherwise specified |
| Management | Managed by director(s) and officer(s) | Managed by member(s) or manager(s) |
| Meeting Requirements | Board of directors, formal meetings, minutes and annual State reports are required | Less formal meetings and minutes are required than for corporations |
| Raising Capital | Shares of stock are usually sold to raise capital | Potential to sell interests, contingent upon operating agreement restrictions |
| Transferability | Shares of stock are transferred with ease | Contingent upon operating agreement restrictions |
| Taxation | Taxed at the entity level and Shareholders receiving dividends are taxed at the individual level | Not taxed at entity level if properly structured. Profit/loss is passed through directly to the Members |
This information is not to be used in lieu of professional legal or accounting advice. The best practice is to discuss your options with an attorney and/or tax professional in order to determine the right entity type for your company.
Registered Agent Service FAQ
Frequently asked questions about registered agents
A registered agent is not a mail forwarding service. While a registered agent does forward all of your legal documents and state correspondence, the registered agent address is not for all of your business mail.
We suggest setting up a P.O. Box for any mail that you do not want delivered to your physical address. Keep in mind, that you may still need to provide your physical address for registered agent service, but that information will not be listed publicly.
A registered agent can either be a designated person or a commercial registered agent service provider. You cannot list your company as your company’s registered agent because most states require the name of the person that is designated to receive state and legal documents on behalf of the company.
A drawback to using an employee of the company is that a registered agent must be available daily during regular business hours to accept legal documents. What happens if that employee is on vacation? You may miss important services of process documents and risk having a default judgment against your company – an action that can include expensive fines.
Commercial registered agent providers are always available to accept documents and will ensure that you don’t miss any of your important documents!
All 50 states, the District of Columbia, and even international jurisdictions require a designated registered agent listed on the incorporation or formation documents of a company.
In nearly all cases, you must list a person or a commercial registered agent provider. A few states will act as your registered agent; however, the Secretary of State will still need to know who at your company to forward your service of process and legal documents on to.