Corps Compared to Limited Liability Companies

The terms used in relation to a corporation are often also used for limited liability companies, which is incorrect and creates all kind of confusion. Let’s take a closer look at both entities.

A corporation is just about the oldest business entity we have that is still in use today. The corporation comes to us from English law. It is based on a legal fiction, to wit, the corp is an “independent person”. As a result, the incorporation of your business is a way to shield yourself from personal liability for any business problems such as lawsuits. The corporate entity, however, does not shield you from criminal liability as the folks at Enron can tell you.

A corporation is formed by filing articles of incorporation with the relevant secretary of state. All business entities are controlled by the states. There is no federal system. Regardless, the owners of a corporation are known as shareholders. If you buy shares of Google on the stock market, you are a shareholder and owner although probably of a small percentage. The corporation is controlled overall by a Board of Directors. When they meet, the general direction of the business is discussed and any resulting decisions are recorded in the minutes of the corporation. The day to day running of the corporation is controlled by the officers, of which the CEO is the top dog. The officers report to the Board. From a tax perspective, the corporation can be taxed as a stand alone entity, known as a C-corp, or on a pass through basis, known as an S-corp.

A limited liability company is similar to a corporation in that it provides a shield of protection from business problems. The “LLC” is a relatively new entity. The first law authorizing its use as an entity was put on the books in the late 1970s in Wyoming. In the late 80s, the IRS issued a favorable tax ruling on the LLC and other states rushed to create their own LLC laws.

You do not incorporate an LLC. Instead, you organize it by filing Articles of Organization with the Secretary of State. The owners of an LLC are not shareholders, they are “members.” The real advantage to an LLC is it does not require the formalities of a corporation. It is a technical subject, but just understand that things are much easier to run. Another big advantage of an LLC is you can elect to be taxed as a partnership by the IRS. With such an election, the business losses and debts pass through to your personal returns. It is comparable to an S-corporation, but usually occurs in a more favorable result when it comes time to file your taxes.

So, what entity should you choose for your particular business? Well, there is no general correct answer. Instead, one needs to look at the particulars of the business and make a decision.