Difference between Corporation and LLC

Published on October 21, 2016

Both legal entities have their own pros and cons and their own weight in gold. It is this article’s aim to highlight the general differences between these two business entities.

Definitions

Corporation vs LLC

A corporation is either a company or group of people recognized by law to act as a single entity. There are many types of corporations, and they are universally categorized by determining if they can issue stocks or not and by whether they are for profit or otherwise. In places where corporations are classified according to their capability to issue stock, such corporations are called “stock corporations.” In the U.S., stockholders own the company. Corporations unable to issue stocks are called “non-stock corporations.” Ownership of the company means obtaining membership in the company, and owners are aptly called members of the corporation. In places where chartered corporations are told apart by whether the corporation is for profit are called either for profit or not for profit.

Corporations may not be individual people, but they are considered legal people and enjoy the same responsibilities and rights a normal person does. This means corporations can exercise their legal rights and sue the government or individuals just as much as they can be held responsible for violating others’ rights as well. Case in point, corporations have been charged and convicted of manslaughter and fraud.

Corporations can be “dissolved” as ordered by a court, statutory operation or as intended by the shareholders.

In the U.S., an LLC or limited liability company is a form of a private limited company that follows a business structure that combines flow-through income taxation in a sole ownership or partnership. This is to avoid double taxation and dividend tax. Although an LLC is not a corporation, it is also characterized with a limited liability feature enjoyed by one. In essence, an LLC offers more flexibility compared to a corporation. It is also well-suited for single proprietorships. In most states, LLCs are viewed as a separate entity from their members. It also uses default tax classification where profits are taxed at the member level.

One drawback to an LLC setup is that it may be hard to pull investors in because they would rather invest in tried-and-tested corporations. Also, many states (e.g., Alabama, Kentucky and Texas) impose a business privilege tax for this limited liability feature.

Corporation vs LLC

So, what’s the difference between a corporation and an LLC? In a corporation, groups of people (or members) are treated as one legal entity, so personal assets of each member are protected from any liabilities, whereas an LLC is a combination of characteristics of a corporation and a partnership.

Corporations can be subject to double taxation where the shareholders and the corporation itself are taxed as property owned by the corporation appreciates in value. If the same thing happens in an LLC, the taxes are “passed through” to the LLC owners due to the fact they do not pay taxes on income. Corporations can attract more investors simply because they have been around a lot longer. LLCs are relatively new and can only attract more investors if they become a corporation as well. It is also easier for corporate employees to become stockholders of the company. LLCs cannot issue stocks.

Comparison Chart

Corporation LLC
Can issue stocks Cannot issue stocks
Prone to double taxation Not prone to double taxation
Can attract more investors Can attract investors if it turns into a corporation

Video

Watch this Youtube clip for more differences between a corporation and an LLC.