Difference between a Corporation and LLC : Knowing the difference between corporation and LLC can help you understand these two separate business entities.
A detailed study about them, however, can only lead to more confusion than comprehension. Hence, to give you a simple picture on how each of them works, let us try to go over the basics.
What is a Corporation
A corporation is owned by its shareholders or stockholders. This entity can have as many as 100 shareholders.
It is characterized by a corporate structure which involves a Board of Directors and a set of corporate officers.
The Board of Directors is responsible for the management of the corporation while the corporate officers are the ones who handle daily activities.
Meanwhile, shareholders do not play a part on the management system, but their approvals are required when it comes to major corporate decisions.
They also play a vital role in electing members of the Board of Directors.
Aside from that, they can be elected as well to become members of the said Board or to be corporate officers.
What is an LLC
On the other hand, an LLC (or Limited Liability Company) is owned by its members. LLCs can have an unlimited number of members.
And regardless of the capital contribution of each member, they can distribute ownership and management among themselves.
This is because an LLC observes a centralized management structure.
Additionally, this entity can be owned by foreign individuals, corporations, or trusts.
An LLC has the freedom on their operating agreement to state an equal division of profits among members.
A corporation can also have the same freedom as an LLC if they have a unique stock class structure.
This is true in the case of a C corporation. In contrast, an S corporation cannot do the same. It is a legal requirement that a corporation must be subject to the double taxation for it to create a unique stock class structure.
C corporations are subject to this double taxation whereas S corporations are directed to a flow through or single taxation.
Difference between a Corporation and LLC
There is a significant difference between a corporation and LLC when it comes to how they are being taxed.
C corporations are taxed on their profits (corporate tax) and also on the dividends received by their shareholders (individual tax); hence, the double taxation.
S corporations are subject to a flow through tax which has no corporate tax.
An LLC, on the other hand, is treated as a “pass-through” or single taxation entity by default. But regardless, they have the flexibility to choose on the manner of their taxation as a business entity.
They can choose to be taxed as a C corporation, an S corporation (if they qualify), a sole proprietorship, or a partnership.
An LLC is a new type of business entity so there is no standard tax entity for it yet.
Thus, it is being considered as one of the traditional business entities; hence, the flexibility on the method of taxation.
When in need of additional funds for expansion or a further business venture, there is a clear difference between corporation and LLC.
A corporation can go to the public financial market to sell a portion of their stocks.
This is a relatively easy task to do when compared to selling membership interests in the case of an LLC.