When starting a business, a business owner must first choose which type of entity to create. Two of the most popular entity types are the limited liability company (LLC) and the corporation. Choosing between these two entities can be difficult for business owners who are not familiar with each type’s unique features. To choose the right one for your business, you should be aware of the similarities and differences between an LLC and a corporation.
LLC and Corporation Similarities
Limited liability companies and corporations are entities legally allowed to organize as a business under state law. Both legal structures provide limited liability – a “corporate veil” — which means owners are in most cases not personally responsible for the company’s liabilities or debts. Each entity’s goal is to protect business owners’ personal assets from being reached in lawsuits against the business or by the business’ creditors.
LLCs and corporations both require documentation to be filed with the state government at the time of formation. A fee to register the business entity must accompany the filing.
LLC and Corporation Differences
Despite significant similarities, LLCs and corporations also have several distinguishing characteristics. The LLC is a newer entity structure that provides more flexibility than the corporation. Here are some of the key differences between these two entities:
- Naming Requirements. This is a small but significant distinction between corporations and LLCs. In Texas (and most states), statutory law requires that the name of an LLC end with the words “Limited,” “Limited Liability Company,” or an abbreviated form of those terms. In contrast, the name of a corporation must end with “Incorporated” or “Corporation.” This distinction is important because your application may be rejected if you fail to comply with these naming requirements. Use care to ensure that your application is not disqualified due to what may seem to be a minor mistake.
- Ownership Structure. An LLC owner is typically called a member, and ownership interests can be defined by units (similar to shares of corporate stock) or by percentage. Meanwhile, the owner of a corporation is called a shareholder or stockholder, and the units of ownership are called shares or stocks. The structure of the corporation transfers easily by dividing ownership into these units. LLCs with ownership interests consisting of units borrow this structure from the corporation, reflecting the LLC’s flexible nature.
- Management. LLCs typically take one of two basic structures: member-managed or manager-managed. In member-managed LLCs, the members conduct the day-to-day management of the LLC. In manager-managed LLCs, one or more managers make decisions for the entity. In manager-managed LLCs, a member of the LLC can serve as a manager. An LLC’s operating agreement may even require that managers of the LLC be members. In corporations, by default, a board of directors has management authority. The board is answerable to the shareholders and is charged with the day-to-day management functions. The LLC members also have the flexibility to choose to create a board of managers similar to a corporation’s board of directors.
- Taxes. Unless they choose to be taxed as a C-corporation, LLC’s enjoy pass-through taxation. This means that the LLC itself is not taxed; rather, the taxes flow through to the LLC’s members. On the other hand, corporations are subject to double taxation. This means corporations must pay taxes on corporate income, and the corporation’s shareholders must also pay taxes on the dividends they receive.
We Are Here to Help
Choosing between these two legal entities requires a great deal of consideration and depends upon your unique needs and goals. If you need assistance weighing the risks and benefits of each business type, please call us today. Our attorneys are ready and available to provide the analysis you need to make the best decision for you and your business.