LLC vs. Corporation
For those who want to start a business, they first need to know some important theories behind starting, sustaining, and making their businesses prosper for the longest time possible. To achieve this, they must apply certain principles that will help them maximize their overall profits, and balance costs versus expenditures. Analyzing these aspects will help to make the business grow, and become a big company in the future, or even a giant corporation.
In this regard, it is important to differentiate LLCs from Corporations. LLCs, or Limited Liability Companies, are created by the presence of one, or a greater number, of business minded individuals. They act as the owners of the company, and act as the members of the organization. At the same time, they set forth a clear operations agreement. It is a pass-through business type, wherein all the incomes and losses reflect back to the owners. Thus, the total net income is taken by the said owner(s), and they are the ones who personally pay the taxes of the company. The said taxes depend on the income of the owner. Nevertheless, the LLCs can opt to be taxed like corporations, if this condition will be favorable for the company.
On the contrary, a corporation is a separate business entity, whose income and loss can be reflected back to the corporation itself, and not to its owners or shareholders. It is an independent organization that designates its shareholders as to how much share each one is allocated. It also has the presence of a Board that oversees the operations of all individual business or companies within the greater organization. This Board is often composed of the corporation’s key directors. Moreover, the corporation is taxed based on the corporate rate.
Lastly, corporations, as the name implies, need to have more formalities in place within the organization, whereas LLCs need not have this kind of trouble. There is less paperwork required for LLCs due to the absence of regular Director’s Board meetings.
1. Taxation is based on the income of the owner for the LLC, whereas it is based on the corporate rate for corporations. Hence LLCs are more flexible in terms of taxation, and all of its owners can be taxed individually.
2. All income and losses must be accounted for by the owners of the LLC (pass-through type of business), whereas in corporations, it is the organization itself who will reap the benefits, as well as answer to the losses of the organization as a whole (separate business entity principle).
3. There are more formalities in corporations when compared to LLCs.