New business owners often get conflicting advice about whether to set up a limited liability company or a corporation.
Both are formed by filing paperwork with the state, and both help to protect owners from liability if the business is sued or runs into financial trouble. There are, however, differences in the way LLCs and corporations are managed and taxed.
Inc. vs. LLC: Liability Protection
The owners of both LLCs and corporations are protected from personal liability for business debts or lawsuits. This means that if the business is sued or faces collection action from creditors, your personal assets—such as your house, your car, and your personal bank accounts—are safe. You may, however, lose the money that you have invested in the business.
Which is better? As a business owner, you will receive the same type of liability protection regardless of whether you form an LLC or corporation.
LLC vs. Corporation: Management and Profit-Sharing
Corporations have a standard and predictable management structure. Every corporation must have a board of directors that oversees the “big picture,” officers who run the business day to day, and shareholders who own stock in the company. Shareholders meet annually, and they receive company profits based on the number and type of shares they own. It’s relatively easy to add new shareholders to a corporation, or to transfer shares from one person to another.
LLCs don’t have to use any particular management structure. They can be managed by their owners (who are known as “members”) or by a group of managers. There are no required job titles, and a small member-managed LLC might be run rather informally. Each member owns a certain percentage interest in the LLC, but profits can be distributed in any way that the members agree to. However, LLC membership isn’t as easily transferred as corporate stock.
Which is better? It depends. Because corporations have a uniform management system and easy transferability of shares, investors tend to prefer corporations over LLCs. Small businesses that aren’t looking to raise outside capital often like the flexibility and relative informality of an LLC. Neither type of business has limits on the number of owners it can have.
Corporation vs. LLC: Taxes