This post contains affiliate links, and we will be compensated if you buy after clicking on our links.
Read our review guidelines.
Are you an eager entrepreneur or small business owner who is looking to hit the ground running with your business?
Starting a business is a very exciting task, but there are several logistical things to consider during this process.
That’s where this article comes in!
As you read along, you’ll find plain definitions for LLC and corporation, a comparison between the two structures, the pros and cons of choosing one, and tips for finalizing your decision.
We’ll do our best to put your mind at ease by taking a step-by-step look at the many reasons to choose either LLC vs. corporation for your business.
- LLCs provide a simple tax structure and flexible governance, which makes them a preferred choice among entrepreneurs.
- Corporations are separate legal entities from their shareholders or owners.
- Both structures resemble each other in terms of liability, while also including some key differences.
- The main difference between an LLC and a corporation is the distinct management structures offered by each.
- Both structures are beneficial, but depending on your business goals, you may benefit more by choosing one over the other.
Limited Liability Company (LLC)
A Limited Liability Company or LLC is a business structure that is popular among small businesses.
LLCs provide a simple tax structure and flexible governance, which makes them a preferred choice among entrepreneurs.
In fact, the LLC structure makes up over ⅓ of all businesses in the United States.
LLCs are subject to a “pass-through” method of taxation, which means that the business taxes are filed through a personal tax return.
Depending on the precise finances of a business, this can be beneficial. In general, the taxation approach for LLCs is simpler than other structures.
Corporations are separate legal entities from their shareholders or owners. This means that the owners of a corporation are afforded asset protection because the business is responsible for all debts and losses.
Interestingly, corporations remain in existence even if shareholders leave the corporation or pass away.
This ensures that the business will continue to be established, despite changes in ownership over time.
This concept, also known as perpetual existence, can offer stability in long-term investments or objectives related to the business.
It can be likened to the corporation becoming its own person.
What’s the difference between an LLC and a corporation?
Now, let’s look at the main differences between an LLC and a corporation with a helpful table below.
Both structures resemble each other in terms of liability, while also including some key differences:
|Members are owners
|Shareholders are owners
|Members manage business
|Shareholders elect a board of directors that manages the business
|Easier formation with potential reduced costs
|More complex formation
Pros & Cons
Next, we’ll weigh the pros and cons of starting either an LLC or a corporation.
Both structures are beneficial, but depending on your business goals, you may benefit more by choosing one over the other:
Easier tax structure
Difficult to transfer ownership
Harder to raise money
Better for rapidly scaling businesses
Easier to raise money
More complex tax structure
How to choose between a corporation and an LLC
The main difference between an LLC and a corporation is the distinct management structures offered by each.
Corporations have shareholders that elect a board of directors to oversee the company and ensure compliance.
The shareholders of a corporation are not legally bound to the company, in terms of liability in the case of financial or legal disputes.
Alternatively, LLCs display a more traditional ownership structure with similar liability protection.
However, it may be tempting to mix personal and business finances when running an LLC (due to the taxation method), which can present circumstances to overturn the limited liability protection afforded by this structure.
Overall, it is wise to consult your options with a financial or legal advisor before committing to any decision.
LLC vs. Corporation: Which option is best for you?
You’re at the end of this article on comparing LLCs vs. corporations – well done!
Picking a business structure can be confusing, but you’re on the right track.
Choose an LLC if your business growth is relatively stable and the organization is small.
However, if you’re expecting the business to take off, and you may need funding, adopting a corporation structure may be the right move.
Now, it’s time to consider the goals of the business and logistical preferences – both of which can be measured against the requirements of LLCs and corporations.
You’re well on your way to establishing your business!
Does an LLC or corporation offer better tax advantages?
Corporations can experience double taxation, which is not a concern of LLCs. Also, LLCs may have a simpler tax approach overall, as taxes are filed in the personal tax return.
Is it more expensive to set up an LLC or corporation?
It is more expensive to set up a corporation, as there is typically more legal and logistical effort involved.
However, when done properly, a corporation becomes a very robust organization.
Do I have to form an LLC or a corporation to hire employees?
No, you can form another business entity to hire employees. A sole proprietorship is a great option if you want to hire employees, but don’t want to commit to an LLC or corporation structure.
However, sole proprietorships do not offer the same liability protections.