Difference Between Corporation and LLC
Choosing the right form of business is one of the many important decisions that are required to be taken by the Entrepreneur. Among the notable form of businesses are Sole Proprietorship, Partnership, Corporation, LLC, etc. These different forms offer their own benefits and shortcomings which are required to be assessed before a decision is to be made.
What is a Corporation?
A corporation is a type of Legal Entity having a separate legal status which is different from its owners and is a more suitable form of business for Large Enterprises. It is an extensive complicated form of business as it requires a lot of record-keeping pertaining to accounting, taxation and compliance formalities. Corporations usually have the word ‘Incorporated’ to their end name. Examples include Amazon Inc, Facebook Inc, etc. The owners of the corporation are known as shareholders and they elect the board of directors who is responsible for the overall policy-making and decision framework of the Corporation. Popular types of Corporations are:
- C Corporation is also known as C Corps are a separate taxpaying legal entity which means that these entities file their separate income tax returns and income distributed by them to their shareholders are subject to Double Taxation. (Double Taxation means that firstly the Income earned by a C Corp is taxed at the rates applicable to it as per the jurisdiction in which it is operating and then dividends distributed to shareholders are also taxed as per the Tax rates applicable to Personal Income).
- S Corporation is also known as S Corps enjoys the benefits of Pass-through taxation which implies that all the Income and expenditure along with deductions and any credits are the direct responsibility of its Shareholders and as such this form is not subject to Double Taxation. It restricts the maximum number of shareholders to 100.
What is a Limited Liability Company (LLC)?
Limited Liability Company (LLC) is a new-age form of business that combines the privileges of both a partnership firm and a company form of business. This form of business limits the liability of the members and separates the debts held by the business. In other words, members of an LLC aren’t held personally liable for the debts of the business.
- Limited Liability Company usually has the word ‘LLC’ to its end name. Examples include Chrysler LLC etc. LLC can begin its operation with a minimum single member and there is no limit on maximum numbers of members. Rules and regulations pertaining to LLC depend upon the country of incorporation and as such, there is no uniformity in the same.
- With minimal legal requirements and fast incorporation benefits; LLC is a good business form for small-scale business and early-stage startups. LLC is run by the Board of Directors which were appointed by its Members in accordance with its Memorandum of Association and Articles of Association.
Corporation vs LLC Infographics
The key differences are as follows –
- Corporation form of business involves stringent legal formalities and record-keeping which has a lot of Compliance cost compared to LLC which has minimal legal formalities and lenient recordkeeping requirements.
- Corporation results in Double Taxation ( except in case of S Corp which suffers from other limitation in terms of the maximum number of members etc) whereas LLC offers pass-through taxation benefit which means the income of LLC is taxed as per the personal tax rates applicable to its members instead of corporate tax rates.
- A corporation is an ideal choice of big business with listing ambition and offers the opportunity to tap funding from varied sources; however, LLC is a good format for small business but it results in limited avenues for tapping funds for further growth and expansion.
|Basis||Corporation||Limited Liability Company (LLC)|
|Meaning||It indicates a business entity that is registered as per the law of the country (e.g Corporation incorporated in India is registered under Companies Act 2013). It is often denoted with an abbreviated “Inc.” after the company name. (Example: Facebook Inc.)||It is a hybrid form of business that provides the privileges of both partnership and company form of business. It is often denoted with an abbreviated “LLC” after the company name. (Example: Chrysler LLC)|
|Ownership Status||The Owners of a Corporation are called Shareholders||The owners of an LLC are called Members|
|Minimum Requirement||Two or more Shareholders||One or more Members|
|Legal Formalities and Compliance||It requires extensive record-keeping and Compliance procedure to fulfill under this form of business||Very less in comparison to a corporation|
|Conduct an Annual General Meeting and Filing of Annual Reports||Corporation are required to conduct Annual General Meeting and file Annual reports with the Appropriate Authority (For example In India its is Registrar of Companies under Ministry of Corporate Affairs)||Conducting AGM is optional and the annual report is not required to file.|
|Existence||It is a going concern and is not affected by the death or ceasing of any shareholders and continues till perpetuity.||Limited Liability Company cannot exist until perpetuity. It has a limited life and it ceases to exist and needs to be dissolved upon death or bankruptcy of its members or if any member leaves the organization.|
|Suitability||A corporation is ideal for a business that prefers having outside investors or Listing ambitions as the ownership to shareholders is in the form of Corporate Shares which are easily transferable.||LLC members hold a certain percentage of the business entity and it is difficult to transfer the same, unlike Corporation.|
|Tax Structure||It results in Double Taxation (C Corp)||It provides a Pass-through taxation feature as the income is taxed in the hands of Members.|
Corporation and LLC both offer their unique benefits along with certain similarities. Choosing one form over the other depends upon the entrepreneur as all the legal formalities before and after the set up of business lies in the form itself and cost-benefit must be done before choosing between the two to ensure business goals are achieved in the best possible manner.
This has been a guide to Corporation vs LLC. Here we discuss the top differences between a corporation and LLC along with infographics and comparison table. You may also have a look at the following articles –