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Understanding Corporations And Limited Liability Companies

Aug 17, 2007
Corporations and Limited Liability Companies (LLC) are formed to shield owners from personal liability for the debts and obligations of their businesses. One of the major differences between a corporation and an LLC is that they have different federal tax liabilities.

Corporations are incorporated according to the state laws and the owners are shareholders, who have stock certificates issued by the corporation. The owners elect a Board of Directors to manage and guide the company and the owners appoint officers to execute and run the day-to-day operations. Members of the company form a Limited Liability Company, which they manage through one or more managers. Both entities, the corporation and the LLC, must pay franchise taxes.

Basic Differences Between The Corporations And The LLC
The basic differences between and the corporations and the LLC are listed below.

1. A corporation pays taxes according to the laws of the particular state applicable to corporations. An LLC with more than one member is classified as a partnership by default. These partners may select being taxed as a C-Corporation or an S-Corporation.

2. In a corporation, the owners are called 'shareholders,' whereas the owners of an LLC are called 'members.' S Corporations can have only 100 shareholders, but an LLC may have unlimited members. Corporations like the S corporations are not permitted to have non-US citizens as owners. This rule does not apply to LLC.

3. A corporation must adhere to certain formalities such as meetings for the Board of Directors, annual shareholders meetings. An LLC doesn't need to engage in these formalities. S corporations can't be owned by an LLC, trusts, or other corporations, but there are no such restrictions on an LLC.

4. Shareholders of a corporation can transfer their shares to another person easily. In the case of an LLC, the members must obtain permission from other members before they can do so.

5. Corporate laws allow shareholders and officers to be individually sued if the corporate formalities are not followed. The LLC laws specifically bar lawsuits against members for the liabilities of the LLC.

6. An LLC is not required to maintain records and documents, but this is mandatory for corporations. If the proper formalities are not followed in the case of a corporation, the owners are liable for the company's obligations.

7. The existence of an LLC is limited to 30 years, whereas a corporation's life is perpetual

8. An LLC offers liability protection like corporations and tax benefits provided by a partnership. However an LLC may face an uncertain future and possibly dissolution if a member dies without leaving instructions to replace, continue, or terminate an LLC.

The major difference between a corporation and an LLC is taxation. C corporations are taxed as separate entities, which pay their own tax, but LLCs are taxed as part of the members' assets. This means C corporation owners can't deduct business loses from individual tax returns, but LLC members can.

Additional Help
These are a few of the differences between a corporation and a Limited Liability Company. It is advisable to form either one or the other according to the needs of your business to minimize the risk of losing personal assets due to unpaid business credits. Several firms offer excellent software and services related to corporations and Limited Liability Companies, which enable them to run smoothly.
About the Author
David Gass is President of Business Credit Services, Inc. His company publishes a free weekly e-newsletter on Small Business Consulting at their
web site http://www.smallbusinessconsulting.com
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