Corporation vs. LLC: What business type is right for you?
The goal of choosing a business structure is about creating a stand-alone entity. By organizing the business into a limited liability company (LLC) or corporation, it safeguards the owners' personal property against debts, lawsuits and bankruptcy.
Choosing between an LLC versus a corporate structure comes down to many factors of the business, including its potential for growth and expansion. While there’s many things to think about, one key consideration is ownership. Members (either individuals or companies) own an LLC, while shareholders own a corporation. Understanding the nature of this ownership will help aid you in your selection.
Corporations vs LLCs: Core considerations of choosing LLC vs corporation
When deciding between the two business structures you’ll want to factor in the following key considerations:
Entity compliance and oversight
Whether the business is organized as an LLC or a corporation, both require registration with the state to achieve good standing and to be allowed to operate. Once registered with the state, the business maintains that standing by submitting various filings and reports throughout the year.
LLC filing and reporting requirements
The requirements for LLCs vary from state to state. In most cases, LLCs must file their articles of organization (or some variation of this), which requests basic ownership information, the purpose of the business, the names and contact information of LLC members and directors, and other information the state may request. States also require LLCs to have a registered agent where they transact business. A registered agent is a third-party provider that receives service-of-process (SOP) and notifications from the government on behalf of the company.
Once registered, the LLC maintains good standing by renewing annual filings, paying any necessary sales tax, filing required tax returns and maintaining any applicable state and locally mandated licenses.
Corporate compliance
Corporations share some of the same compliance requirements as an LLC, but generally it comes with more requirements, accompanied by extensive paperwork and record-keeping.
A corporation starts by filing articles of incorporation with the secretary of state. This includes important details about the business, including company name, type of corporate structure (such as profit vs non-profit), names and contact information of leadership and board members, and the number of shares authorized.
To maintain good standing with a state, corporations must submit annual reports, and provide documentation when there's a change in officers and directors.
Multi-state complexities
When a business operates in a single state, staying on top of entity compliance will be straightforward as there’s only one set of requirements to meet. However, when the business gains entities in multiple states after an expansion, merger and/or acquisition, that can introduce many new layers of compliance issues.
Because state requirements differ for both LLCs and corporations, entity management must become a higher priority when there's a multi-state presence. It’s worth noting that states don’t have a convenient reminder system to help companies stay on top of their paperwork and filings. States usually alert you only when something is past due or missing. At that point, the company's standing can be in jeopardy. The onus is on the LLC or corporation to provide their own oversight to maintain good standing. A robust entity management system, like Computershare’s GEMS can help mitigate risk and protect assets by flagging filings that need to be renewed, helping ensure accuracy and following multi-state filing requirements.
Management structure
LLCs can have a more flexible management structure that suits the business and partners. Owners of an LLC are referred to as members and operate in a similar manner as shareholders do of a corporation. Read more about operating structures in an LLC here.
Corporations are owned by shareholders and therefore require a board of directors and annual meetings. The board of directors are elected by the shareholders to operate the corporation.
Taxation
Corporations are subject to what some consider double taxation. In addition to corporate tax (21%) on profits, more tax is collected when shareholders report dividends on tax returns.
An LLC, on the other hand, deploys pass-through taxation. This means instead of paying the corporate rate, LLC partners can opt to have business profits and losses “pass through” to their personal tax returns, which are subject to a lower rate. For some businesses, this tax structure can bring a sizable financial advantage. On the other hand, when LLC owners are obliged to pay self-employment taxes, the LLC does little to nothing to relieve the tax burden.
Some companies find relief by pursuing alternate entities. An S-corporation, for example, eliminates the double taxation on dividends. While the federal government recognizes this structure, some states do not and would tax the entity under the standard C-corporation structure. A certified public accountant can help your team assess the tax advantages.
Capital and growth
A company that’s growing often needs infusions of cash, whether it’s for a new product launch or research and development activities. A corporate structure can affect where you get access to capital.
Both an LLC and a corporation can raise working capital through loans and venture capital. But only a corporation (specifically a C-Corp) can have a public IPO and sell shares on the stock market.
Longevity of the business
Think about the long-term prospects of the company. Would it make sense for the company to become a stand-alone entity? Perhaps the goods or services lend themselves well to a company that exists in perpetuity. Corporate structure allows the business to continue — even when shareholders, a founder or a partner withdraws — without disturbing the business and its ability to operate. The corporate structure paves the way for replacements to take over vacated roles.
On the other hand, if the business is more entrenched in the contributions of specific partners, then an LLC might make more sense. What happens if a partner or shareholder leaves? The remaining partners could buy out their shares and continue the business if state law permits this. In certain states, a partner's departure or demise can trigger an automatic dissolving of an LLC, leaving the remaining partners to form a new firm.
Evaluating your options
As the above shows, choosing whether an LLC or corporate structure is best for a business depends on its size, taxation, growth and whether it can exist without founders or key partners.
Either way, it's important to understand and follow the state regulations that are specific to LLCs and corporations, so nothing interferes with the company's standing and ability to operate. That's where Computershare's Global Entity Management System, or GEMS enters the picture.