If you are starting a new business enterprise, you face a number of significant decisions, according to our incorporation lawyers. High on the list is deciding what type of legal business entity to establish. For example, you may be debating over whether or not to set up a corporation of a limited liability company (LLC). Before you can make a decision on which type of legal entity best meets the needs of your start-up or other business enterprise, you need to have a basic understanding of a corporation and LLC. You must understand what these legal entities have in common and how they differ.
What a Corporation and LLC Have in Common
Taxes: The reality is that a corporation and an LLC do have a variety of features in common with one another. Keep in mind that when discussing a corporate structure for a small business enterprise, the type of entity usually is what is called a Subchapter S corporation. A Subchapter S corporation is not “double taxed.” A Subchapter C corporation is taxed both at the corporate level and then again when the shareholders (owners) earn money through dividends or some other type of distribution. With a Subchapter S corporation, pass through taxation occurs. In other words, there is no tax imposed on the business enterprise itself and the tax liability passes through to the owner or owners of the enterprise. The same type of pass through taxation exists for an LLC as well. As a result, profits and losses of both this type of corporation and an LLC are dealt with at the level of the owner or owners.
What a Corporation and LLC Have in Common
Liability: Liability limitations represent another area a corporation and an LLC have in common. As a general rule, an owner will not be responsible for the debts or liabilities of the business. In addition, if the business is sued for some reason, the owner will not usually be held responsible for any judgment that might be entered against the business, whether a corporation or LLC. This is the general rule in all types of lawsuits, including those for personal injury. Incorporation lawyers can explain the limited situations in which this would not be the case.
Differences Between a Corporation and an LLC
Incorporation lawyers will explain that an LLC can have an unlimited number of owners. A Subchapter S corporation is limited to not more than 100 shareholders or owners. Only citizens or legal residents of the United States can participate in a Subchapter S corporation as a shareholder or owner. This limitation does not exist in regard to an LLC. Only individuals can be shareholders of a Subchapter S corporation. On the other hand, an LLC can be owned by any type of legal entity, including an individual. In addition, there are no limitations on the types of subsidiaries that can be owned by an LLC.
Transfer of Ownership
In most cases, it is easier to transfer an ownership interest in a Subchapter S corporation than it is with an LLC. Typically, an LLC will have more restrictions on how an ownership interest can be conveyed of transferred. Keep in mind that the owners of an LLC do have the ability to make transfers of ownership more restrictive, if they so desire. For example, the organizational instruments can contain a clause requiring the agreement of a certain percentage of owners to approve the conveyance of an interest in the LLC to another individual or legal entity. Incorporation lawyers assist in determining what will be required when it comes to transferring an interest in a specific enterprise to a third party, should the need or desire for such a conveyance ever come to exist.
Paperwork, Reports and Record Keeping
Overall, the amount of time spent maintaining records and dealing with reports and record keeping is more significant with a corporation than is the case with an LLC. For example, a corporation needs to maintain minutes of board meetings and similar types of documentation which are not required with an LLC. On a related note, the paperwork and documentation involved in setting up a corporation in the first instance is usually more substantial than that associated with an LLC. Incorporation lawyers are able to lay out these differences with specificity to a person interested in launching a new business.
Term of Existence
A corporation typically can exists indefinitely. On the other hand, an LLC typically has a specific period of time during which it will be in existence. Extending that period of time requires an affirmative act by the owners of the entity.
Contact Experienced Incorporation Lawyers
Once you make the decision to move forward with starting a business venture, contact the experienced incorporation lawyers at Sutton Law Center by calling 775-824-0300 for an initial consultation.