This guide provides an overview of the advantages and disadvantages of forming a corporation, on the one hand, and a limited liability company, on other.
Corporation - Advantages and Disadvantages
A corporation is a separate and distinct legal entity created under state law and owned by its shareholders, and, therefore, protects its owners from personal liability for corporate debts and obligations (up to the amount invested in the corporation). A corporation by default (referred to as a C corporation) is taxed at two levels (i.e. double taxation). In other words, a C corporation pays a corporate tax on its corporate income (the first tax), and then, the C corporation distributes profits to shareholders who pay income tax on those dividends (the second tax).
Corporation formation requires filing with the appropriate state agency as well as a filing fee like a Limited Liability Company or Limited Liability Partnership.
ADVANTAGES
Shareholders (owners) are only personally liable up to the amount invested in the corporation.
Flexibility to allow owners to participate in the management of the business or to act solely as passive investors;
No limits on the number of shareholders;
Ownership is easily transferred through the sale of shares in the corporation;
Most accepted business type for outside investors, both large and small;
Corporations continue to exist beyond the life of the owners.
DISADVANTAGES
Have rigorous ongoing business requirements such as annual reports, holding shareholder and board of director meetings;
Are subject to double taxation;
More expensive to form and maintain than a limited liability company, sole proprietorship or general partnership.
Limited Liability Company - Advantages and Disadvantages
A limited liability company, or LLC, is a business entity created under state law that combines characteristics of both a corporation and a partnership. Like a corporation, the owners of an LLC are generally, not personally, liable for company debts. Like a sole proprietorship or a partnership, an LLC has operating flexibility and is, by default, a "pass through" entity for tax purposes. This means that the LLC does not pay taxes on its profits, but instead, profits and losses are "passed through" to the owners, who must then pay tax on their share of LLC income.
To form an LLC, owners must file with their appropriate state agency and pay a filing fee.
ADVANTAGES
Members (owners) are not personally responsible for business debts and obligations (liability protection);
Flexibility in management control and profit sharing;
High degree of flexibility and simplicity in the ongoing management of the business;
No extra tax filing requirement as profits or losses can be reported on the owner's tax return (pass through taxation) unless the LLC chooses to be taxed as a corporation (double taxation);
No ownership restrictions (e.g., US citizens or # of owners) which is similar to an S corporation.
DISADVANTAGES
More expensive to form than a sole proprietorship or partnership and, in certain situations, may be more costly to form than a corporation (but only at the outset);
Operations and decision-making authority often vested substantially in a single Manager (limited membership rights);
Certain investors may be less comfortable dealing with or investing in an LLC rather than a corporation.