The Corporation v. The LLC

We’re often asked by new business owners whether a corporation or an LLC is right for them.  Our answer is always the same – it depends entirely on your business model and what you are looking to accomplish.  There are advantages and disadvantages to both entities.  The following is a brief overview of the advantages and disadvantages of each:

Corporations

A corporation is a business entity owned by and separate from its shareholders.

Advantages

• The shareholders of a corporation are, for the most part, shielded from personal liability for the actions and obligations of the corporation.

• A corporation maintains a perpetual existence.  In other words, the death or withdrawal of a shareholder does not result in dissolution of the corporation.

• Generally, ownership of the shares of a corporation can be transferred with relative ease.

• A corporation, in many instances, can declare subchapter S status and avoid double taxation.

• The statutory and case law governing corporations is well developed and in many ways predictable.

Disadvantages

• Corporations typically have strict formal record keeping and reporting requirements.  These requirements can often be cumbersome and make a corporation more difficult and expensive to administer than an LLC.

• The administration fees for public corporations are higher as they must comply with complex provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934.

• Corporations in the United States that do not elect subchapter S status may be subject to double taxation.  The income of the corporation is initially taxed at the corporation level.  The distribution of corporate earnings to the shareholders is then taxed as income at the shareholder level.

LLCs

An LLC is a business entity designed to be taxed like a partnership while offering it’s members limited liability.

Advantages

• An LLC is generally taxed like a partnership, thereby exposing it to a single level of taxation.  Instead of the LLC being subject to income taxation, the members of the LLC are subject to a tax based on their allocable share of income.  With respect to single member LLCs, the single member must report and pay taxes on the LLC’s taxable income as if that member conducted the activities of the LLC himself.

• The members of an LLC receive protection from the debts and liabilities of the LLC, similar to that of a corporation’s shareholders.

• An LLC offers structural flexibility.  Members may actively participate in the management of the LLC or in the alternative, management may be delegated to a manager or group of managers.

• Unlike a corporation, minutes of meetings and resolutions are not necessary to operate an LLC.

• An LLC allows for flexible distribution of profits – equal interests are not necessary.

Disadvantages

• The LLC as a business entity is still relatively new.  As such, the statutory and case law governing LLCs is not yet well developed and is therefore less predictable.

• The initial setup of an LLC is often more complicated and involved than a corporation.

• The annual filing fee in Massachusetts for an LLC is significantly higher than that of a corporation.  However, this disadvantage is generally offset by other cost savings.