Key Similarities
Limited Personal Liability
Both structures limit
liability to the amount shareholders or members invest in the company.
Therefore personal assets, including homes, cars, savings and
investments, are protected from the liabilities and risks of the
business.
Ability to Raise Capital
Both structures allow a business to borrow money and sell equity to raise capital.
Unlimited Duration
Both structures continue indefinitely, unless they are dissolved.
Key Differences
Tax Flexibility and Profit Distribution
LLC’s
provide pass through tax treatment and avoid an entity level tax. This
means that an LLC is not a separately taxable entity and business income
or losses are reported on the individual tax returns of the owners.
This is similar to an S Corporation, but different from a C Corporation,
which is a separate taxable entity. For those LLC owners who wish to be
taxed as a corporation, however, they may elect such tax treatment by
making a filing with the IRS. Another advantage of an LLC over a
corporation is the ability to allocate profits and losses among the
members as the members agree, while in corporations dividends can only
be paid pro rata according to share ownership. The IRS allows for
special allocations for LLCs and we recommend consulting your accountant
or tax advisor to learn more about this option.
Corporate Structure & Formalities
An LLC
generally requires less corporate formalities than a corporation. LLC’s
may be managed directly by members; there is no need to have a separate
board of directors or annual shareholder meetings and periodic directors
meetings with minutes. For many, the convenience and simplicity of
forming a single-member LLC that is managed by the member provides the
limited liability protection without adding a lot of corporate
bureaucracy.
State Filings
LLC’s do still require State
Filings, though they are different from those for Corporations. Articles
of Organization must be filed with the Secretary of State to form an
LLC and the members of the LLC are required to enter into an Operating
Agreement that governs how the LLC will be operated.
Number of Owners
Both Corporations and LLCs can
have multiple owners, but there are differences in how many. LLCs and C
Corporations can have an unlimited number, while S Corporations are
limited to 100 Shareholders.