Many business owners often ask what type of entity is more beneficial, a corporation or an LLC. Both have more formal and expensive formation requirements than a General Partnership, but each offer certain advantages that are appealing to new business owners.
Both corporations and LLCs are formed when one or more organizers execute a Certificate of Formation and deliver the certificate, along with a filing fee, to the Secretary of State. The Certificate of Formation for a corporation must include the corporation’s name and address, duration of the corporation, statement of purpose, and capital structure. To create an LLC, the certificate must include some variation of “Limited Liability Company” in the name of the LLC.
WHAT ARE THE BENEFITS OF A CORPORATION?
- Limited Liability: Unlike a General Partnership, the shareholders of a corporation are not liable for the debts and obligation of the corporation. This includes liabilities for torts as well as contracts.
- Availability of S-Corporation: After filing with the Secretary of State, a corporation has the option to file an “S” Election with the IRS. The main benefit of being treated as an S Corp is that income is passed through to the shareholders, and the corporation is no longer subject to double taxation. However, there are several requirements to qualify as an S Corp: (1) only 100 or less shareholders all of whom must be US citizens or residents; and (2) there can only be one class of stock and that class of stock may not be publicly traded.
WHAT ARE THE BENEFITS OF AN LLC?
- Flexible Management: Whereas a corporation is run by the Board of Directors, in an LLC all owners have the opportunity to exercise control. An LLC is not subject to all of the same internal statutory formalities like a corporation. Exactly how control is allocated is usually determined by agreement among members.
- Limited Liability: As the name suggests, forming an LLC shields its members from liability for firm debts and obligations. Additionally, if one member commits a tort in the course of ordinary business, only the LLC itself and the tortfeasor are liable.
- Taxation: Another major appeal of the LLC is that members have the option to decide how the company is taxed. Generally, an LLC enjoys pass-through taxation, meaning that income is passed through to the owners. However, members may elect to be taxed like a corporation.
Chelsea Walker and the attorneys at De Leon & Washburn, P.C. are available to assist clients with entity selection and formation and governance. For more information regarding the firm’s business transactions practice, please visit our Business Transactions page, and please feel free to contact the attorneys at any time.