If you are launching a new company, you must select what form (or business entity) it will take. In short, you will need to choose to file your new business as a corporation or an LLC.

Fortunately, the right decision for you will likely become clear with a little information about each option’s implications and features. Read on for a brief comparison of corporations and LLCs.

Corporation vs LLC

A way to separate a business owner’s personal assets from business assets, the corporation is a business entity nearly as old as business itself. Corporations assume a certain administrative structure that allows for outside investment growth through easy transfer of company shares.

Short for “limited liability company,” LLC offers protections and benefits that are similar to those of a corporation, but they offer more flexibility in terms of administrative structure, different taxation policies, and looser recordkeeping standards.

The Key Differences Between Corporations and LLCs

To establish your business as either a corporation or an LLC, you must file articles of incorporation with the state government where your business is located. However, each of these business entities comes with its own list of pros and cons. Here are the major differences between corporations and LLCs:

  • Ownership
    Shareholders own corporations and generally elect boards of directors to run them. The members of an LLC own and operate it independently.
  • Liability
    A corporation transfers little liability to shareholders, protecting their personal assets from lawsuits and other financial threats faced by the company. True to its name, an LLC offers limited liability protection to its shareholders but holds them liable for the amount they have invested in the company.
  • Taxation
    In a corporation, the business itself is subject to corporate income tax on its profits and shareholders are subject to personal income tax on the dividends they receive. Taxed as pass-through entities, LLCs generally pass on company profits and losses to individual members, who must report them on their personal tax returns.
  • Regulations
    While corporations must hold regular shareholder meetings and report the minutes of meetings, LLCs are generally free from such requirements.

LLC vs Corporation: Pros and Cons

As noted above, LLCs are generally simpler to set up and operate, but corporations offer greater liability protection and opportunity for growth through the sale of shares. The “pros” of filing as an LLC can easily become “cons” depending on the size of your business today and how big you want it to become in the future.

In short, smaller companies with fewer owners and more modest growth expectations tend to gravitate toward the LLC while bigger companies that want to spread ownership among numerous shareholders tend to gravitate toward the corporation.

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