Limited Liability Corporations

By Amy McDaniel

A limited liability corporation is what many refer to when they are inquiring about the LLC. An LLC offers small business owners the same benefits of a corporation plus more. Compare the two here:

LIMITED LIABILITY

Many business owners are trying to decide between an LLC and a corporation. Both offer owners of the business limited liability. Corporation entities, however, are required to hold certain meetings and maintain paperwork formalities. The LLC offers the ability to run a business without additional formalities.

OWNERSHIP

The limited liability company issues membership units and its owners are called members. The corporation issues shares of stock and the owners are called shareholders. In most cases, both types provide a similar ownership structure. The difference is that the LLC allows a lot more flexibility if the owners of the business wanted to customize their ownership rights and obligations among members.

This flexibility is attractive to small businesses because it allows a business to be operated based on the circumstances of the personalities and desires of the particular business owners and not under a one size fits all structure mandated by the laws. For example, two members can own the same number of units, but one of them can get more profits than the other.

GOVERNANCE

Traditionally, while corporate statutes have explicit provisions regarding limited liability, corporation shareholders are generally required to hold an annual meeting and elect a Board of Directors each year. The Board is responsible for management of the business while shareholders in their capacity as shareholders have no such authority.

The limited liability company offers an option for a manager managed governance structure which is a similar centralized management structure as the corporation. Instead of a Board of Directors, the governing body is called the Board of Managers. The LLC statutes do not require annual meetings and elections and allow for the company to make its own rules in how and how often managers are elected.

In addition, a limited liability corporation can have a much simpler structure and have its members all be managers and operators of the business. This is a member managed structure. This gets rid of the central and second level which provides for less paperwork and governance maintenance. The downside here is that you must trust all members as they will each have authority to act on behalf of the business.

TAXATION

A huge benefit of an LLC is that it automatically qualifies for a single layer of taxation (called pass through taxation) without requiring the business or its owners to meet any conditions or requirements.

The corporation's default structure results in double taxation which can have a major impact on the bottom line profits. The LLC also allows for it to elect to be taxed as a corporation which is nice because it offers the option. In some cases, it may be more beneficial to have a corporation structure. Check with your accountant.

Both the limited liability company and the corporation allow for the business to elect S corporation taxation if the owners of the business and the business itself meet the laundry list of S corporation requirements. S corporation taxation is another form of pass through similar to what the LLC gets automatically.

In summary, the LLC offers more tax options than the corporation which provides business owners with more choices to choose which is most advantageous to their business.

OTHER

Fees for corporations can sometimes be based on the # of shares and so if you plan on having a large number, your fees could be significant. LLC maintenance fees are usually minimal in most states (there are exceptions) and do not vary with the number of membership units issues.

If your business plans on going public, you must be a corporation as there is not method to sell membership units on NASDAQ or the NYSE yet. Also, if you plan on raising capital by taking in a venture capital investor, the investor will likely require you be a corporation.

Otherwise, the LLC usually offers the typical small business owner with the most benefits and the easiest type of legal entity to operate. Both offer limited liability. Corporation entities require a bit more when it comes to starting, structuring and operating a business.

For a FREE LLC Guide or to access an extensive FAQ knowledge base about the limited liability corporation, visit The LLC Expert: http://www.TheLLCExpert.com