What is the difference between a Corporation and an LLC?
As we have discussed, an entity protects business owners from personal liability for business debts. The most common entities for small businesses are corporations and limited liability companies. They give the same amount of legal protection.
Corporations are very centralized and regulated entities. They are owned by shareholders, major decisions are made by officers and carried out by officers. For the most part, ownership is determined by the capital contribution of the owners. The owners (shareholders) have limited personal liability for company debts. The corporation is a separate taxable entity from the owners. North Carolina law requires annual meetings of shareholders and directors. Some corporations elect to be taxed as partnerships and are known as S-corporations.
Limited liability companies are generally more flexible than corporations. They are akin to partnerships but have limited liability for the owners. The statute is purposely skimpy, to give the owners (members) the ability to enter into a detailed contract called an operating agreement regarding the relationship among the owners, management responsibilities, duties of owners, tax considerations, and what to do upon the death or disability of an owner. LLCs are desirable because they are flexible as to management participation (active vs. silent partners), initial investments (sweat equity vs. capital investment), and allocation of profits and losses (do not have to be the same as ownership percentage), yet they provide limited liability. LLCs are managed by managers and are not required to have annual meetings.
While both entities provide equal limited liability, there can be significant tax differences between the entities.
How to pick the right entity?
When determining what entity to pick, we look at the following:
Number of owners
Degree of Formality
We will discuss all the above topics with the business owners and their accountants and determine which entity is the best fit for that situation.