To determine which business structure is better, a limited liability company or a corporation, you need to compare them and decide which is best for your business. The most efficient way to compare the two is in terms of their rules on taxes, growth, ownership and ease of administration. Once you see the two business formats side by side, you can determine which is the right choice for your business.
Both an LLC and a corporation are able to pass through revenue to be claimed as income on owners' and shareholders' personal income tax returns. The difference is that all of the revenue from an LLC is subject to self-employment tax that must be paid by the company owners, whereas a corporation shareholder is subject to self-employment tax only on the portion of revenue considered to be personal income. If you would like to limit your exposure to paying self-employment taxes, a corporation is the better choice.
One of the ways in which a company can choose to grow is to go public and offer stock. With a corporation, the company has the option of offering stock to the public after going through the necessary process set up by the Securities and Exchange Commission. An LLC is unable to issue public stock and cannot benefit from the sale of shares. If you intend to grow your company through public stock offerings, a corporation would be better for you.
A corporation has a strict set of rules when it comes to ownership. The shareholders of a corporation must be legal residents of the United States, and they cannot be other legal entities, such as a trust or another corporation. As of 2009, the maximum number of shareholders allowed for a standard S corporation is 75. With an LLC, the owners can be from anywhere in the world and can be any legal entity. If you plan on having a diverse roster of owners from a variety of countries, an LLC is the best plan for your company.
Ease of Operation
Setting up an LLC is a simple process requiring the submission of the required forms and a partnership agreement. A corporation requires a more complicated registration process, and the official designation of a corporation is not complete until a meeting is held and officers are elected. A corporation is required to hold an annual directors and shareholders meeting, while an LLC is not required to do so. If you are looking for a business structure that is easy to set up and maintain, an LLC is better.
- Business Know-How: Differences Between LLCs and S-Corps; Michael N. Cohen; 2006
- CNN Money: The Difference Between an S-Corp and LLC; Shara Rutberg; Jan. 10, 2008
- Power Home Biz: S-Corp vs. LLC: Which Structure Is Right for Your Business; Chrissie Mould; April 2009
- Bankrate: Inc. vs. LLC: Which Legal Structure Suits Your Business?; Jenny C. McCune; August 31, 2000