Comparing LLCs and Corporations
Should you form an LLC or incorporate? LLCs and corporations both protect your personal assets, but they differ in how they’re taxed, owned, and run. Below, we’ll go over the similarities and differences between the two and how to pick the right one for your company.
Similarities Between LLCs and Corporations
An LLC and a corporation are both formal business entities, which puts them a step above sole proprietorships and general partnerships. Both are created by a state filing, both protect their owners’ personal assets, and both have ongoing state requirements to keep up with. Here’s a closer look at what they share.
State Filing
Both are official business entities created by filing paperwork with the state. An LLC files articles of organization; a corporation files articles of incorporation. Sole proprietorships and general partnerships can do business without a state filing.
Limited Liability
Both keep the business legally separate from its owners. Debts and assets belong to the business, so if the business gets sued, the owners’ personal assets are typically protected. Sole proprietors and general partners don’t get that legal separation.
Registered Agent
Both must keep a registered agent with a physical street address in every state where they conduct business. The registered agent is the person or entity assigned to receive service of process and official government mail on behalf of the business.
State Compliance
Most states require both to file an annual report that updates the business’s basic contact information, and most charge a filing fee. Requirements and fees can differ by entity type. New Mexico and Arizona, for example, don’t require annual reports from LLCs.
Differences Between LLCs and Corporations
Here’s where an LLC and a corporation part ways.
Attribute |
LLC |
Corporation |
|---|---|---|
| Owners are called | Members | Shareholders |
| Ownership unit | Membership interest (a percentage) | Shares of stock |
| Transferring ownership | Usually needs other members' approval | Shares transfer easily |
| Who runs it | Members directly, or managers they appoint | Board of directors, which appoints officers |
| Default tax treatment | Pass-through (sole prop or partnership) | C corp |
| Tax election options | Sole prop/partnership, C corp, or S corp | C corp or S corp |
| If an owner is personally sued | Creditor usually limited to a charging order on distributions (varies by state) | Creditor can be awarded the owner's shares |
| Required meetings and minutes | Not typically required by statute | Annual meetings and minutes nearly always required |
| Appeal to investors | Lower | Higher |
Tax Election Options
LLCs have more tax election options than corporations. A corporation is taxed as a C corp unless it qualifies for and elects S corp status. An LLC starts out taxed like a sole proprietorship or partnership, depending on how many members it has, and can elect to be taxed as either type of corporation instead.
Tax treatment |
LLC |
Corporation |
|---|---|---|
| Sole proprietorship (1 owner) | Default | Not available |
| Partnership (2+ owners) | Default | Not available |
| C corp | By election | Default |
| S corp | By election, if eligible | By election, if eligible |
Sole Prop or Partnership – Profits pass through the business to the owners, who report them on their personal tax returns. The business itself pays no entity-level income tax. All of that income is subject to self-employment tax.
C Corp – The corporation files and pays its own income tax. Shareholders then report any dividends on their personal returns, so the same profits are taxed twice: once at the business level and again at the owner level. This is called double taxation.
S Corp – Profits pass through to the owners, and the business generally pays no federal income tax. Owners who work in the business must pay themselves a reasonable salary, subject to payroll taxes, before taking distributions. S corps are limited to 100 shareholders.
For a quick summary of the effects of these elections, see our page on How to File LLC Taxes.
A Closer Look: Ownership, Management, and Protection
Here’s how those differences play out day-to-day.
Details |
LLC |
Corporation |
|---|---|---|
| Ownership | LLC owners, or "members," each own a percentage of the company called a membership interest. That interest isn't easy to transfer: you'll need the other members' approval, and in some cases you can't transfer it at all. | Corporate owners are called shareholders, and they own shares of the company's stock. Shares can usually be bought and sold easily, which makes a corporation more attractive to outside investors. |
| Management | In a member-managed LLC, members handle daily operations. In a manager-managed LLC, members appoint managers to run the business and act more like shareholders: they can vote in managers but don't handle day-to-day decisions. | Corporations follow a set structure. Shareholders elect a board of directors to govern the business, and the board appoints officers, such as a president, treasurer, and secretary, to run day-to-day operations and carry out the board's decisions. |
| Asset Protection | If a member of a multi-member LLC is sued personally, the creditor is limited to a charging order. That's a lien on the member's share of distributions: the creditor collects that member's profits, but gets no ownership of the LLC. Charging order protection varies by state. | If a shareholder is sued personally, creditors in nearly every state can be awarded that shareholder's stock. If the shareholder owns a majority, the creditor could end up controlling the corporation. Charging order protection varies by state. |
| Formalities | State laws don't typically require LLCs to hold annual meetings or keep formal minutes. Doing both is still a good habit, but it's up to you. | State laws usually require corporations to hold annual meetings and record formal minutes. The "Inc." or "Corp." designator can add credibility that "LLC" may not. |
LLC or Corporation: Which Is Right for You?
It depends on your vision for the business. Small businesses that value flexibility often choose LLCs, while larger businesses that want more structure or plan to bring on many investors often prefer corporations.
- Want control of how the business is managed
- Want the widest range of tax options
- Want stronger protection if you're ever sued
- Prefer fewer required meetings and records
- Want a clear board-and-officer structure
- Plan to raise money from many investors
- Want ownership that's easy to buy and sell
- Value the credibility of "Inc." or "Corp."
Whatever you need, we can help.
At Northwest, we form LLCs and corporations, provide registered agent service, and much more.