Corporation vs LLC
When you plan to start a business on your own or with partners and decides to legally register the company in the country of your choice, you may have to make many important decisions. One of the important decisions you have to make is the structure of the company you are going to form. There are real advantages in choosing a structure that is best suited to the way you want to operate. For that you need to know the accepted types of business structures incorporated under the company act of the country and the responsibilities and regulations associated with it.
Some of the important factors considered in choosing the right business structure are, the way tax applies to business, legal liability, the protection of your assets and operating cost.
A limited liability company (LLC) is an entity, whose owners enjoy limited liability (obligation/responsibility) for the company’s debts and losses. In most cases, the liability of the owners is limited to the face value of the shares fully paid. This gives the owners the protection for their personal assets from business debts. Members cannot be held personally liable for debts unless they have signed a personal guarantee.
LLC is a type of business structure combining several features of corporation and partnership structures, but not a corporation or partnership. The owners are called members, not shareholders or partners and the number of members is unlimited. Anyone can be a member of the LLC; individuals, corporations or even other LLCs can be members of it.
A corporation is a formal business association with a publicly registered charter recognizing it as a separate legal entity having its own privileges, and liabilities distinct from those of its shareholders.
A corporation enjoys most of the rights and responsibilities that an individual possesses that is, a corporation has the right to enter into contracts, loan and borrow money, sue and be sued, hire employees, own assets and pay taxes.
A general corporation may have unlimited number of shareholders. The most important aspect of a corporation is that its shareholders have the right to participate in the profits, through dividends and/or the appreciation of stock, but are not held personally liable for the company’s liabilities. A shareholder’s personal liability is usually limited to the amount they invested in the corporation.
In both, Corporation and LLC, the member/shareholder’s liability from the debts of the business is limited and they are protected from lawsuits against the business. But the tax system differ from each other.
In LLC the profits and losses of the business passes through to the members depending on their share of membership. Then the members pay the tax on his or her personal tax returns based on the adjusted gross income of the owners. Whereas, corporations are separate legal entities, the profit and losses of the corporation are taxable to the corporation at corporate rate, not the owner/shareholder.
In corporation a Board of Directors are appointed and they oversee the business. In LLC the members set out an operating agreement and abide by that agreement.
In short, a corporation is a legal entity separated from its owners. Business decision making is with the Board of Directors. Owners/shareholders are protected from liabilities of the corporation, and the corporation pays income taxes at corporate rate. Whereas, a limited liability company (LLC) is formed by one or more members whose liability is limited to their investment. An LLC is often used in place of partnerships to limit liability. Tax is paid through the personal tax returns of the individual member’s adjusted gross income.