Corporation vs. Company

Corporation vs. Limited Liability Company

A limited liability company (LLC) and a corporation are each considered a legal "person" in the eyes of the law. So, what is the difference between a company and a corporation?

An LLC and a corporation certainly have many similarities. However, there are some important differences.

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Who Should Form an LLC?

An LLC is a great business structure for small businesses. Small business owners who decide to structure their business as a separate legal entity usually choose to form an LLC. Business owners and the LLC are treated as separate business entities. This is helpful because it gives the owners some liability protection from the debts accumulated and actions taken by the LLC.

The following are the steps for forming an LLC:

1. Select a business name and make sure it is available.
2. The LLC business owners must file the LLC's articles of organization with the secretary of state and decide on an operating agreement that lays out the company's day-to-day operations.
3. Pay the filing fees and other licensures, and any applicable fees for permits.

Who Should Form a Corporation?

A corporation is an advantageous business structure for large businesses. Owners of a corporation are not personally liable for the business's debt or contracts of the business because the corporation has its own legal status. A corporation can sign its own contracts and is responsible for its own business obligations.

Owners of a corporation must follow these steps for incorporation:

1. The business owners must name the corporation
2. The business owners must choose the state of incorporation
3. A board of directors must be appointed
4. The board of directors must create the corporation's articles of incorporation
5. The articles of incorporation must be filed with the secretary of state
6. The corporation must choose its tax structure as (i.e., an S corporation or C corporation)

How Are LLCS and Corporations Taxed?

An LLC and a corporation have different business structures and are not taxed in the same manner.

How Is an LLC Taxed?

A limited liability company is a legal person and is a separate legal entity from the business owners. However, for tax purposes, the IRS does not tax an LLC as separate from its owners.

The IRS treats a limited liability company as a "pass-through" entity. In a pass-through entity the tax obligations of the LLC filter through the company and land with the individual members.

Because the profits of the business pass-through to the members, the LLC itself does not pay taxes. The LLC members report the business's income or losses on their personal tax returns.

How Are Corporations Taxed?

There are two different types of corporations. The corporate tax depends on the corporation's legal status as an S corporation or a C corporation.

S Corporation vs. C Corporation

An S corporation (or S corp) is treated as a pass-through entity by the IRS. With an S corp the corporation is not taxed and the shareholders report any profits or losses on their individual returns.

A C corporation (C corp) is a business structure that protects individual stockholders' personal assets from:

• The tax liability of the corporation
• The creditors of the corporation

One of the biggest problems with structuring a business as a C corporation is that a C corp is subject to double taxation. This means the corporation pays a corporate tax, and then the corporation pays the stockholders. The stockholders then pay personal income taxes on the same source of income.

S corporations and LLCs are not subject to double taxation.

Nonprofit Corporations

Nonprofit corporations carry on a purpose that is noncommercial (like for religious or educational purposes). Nonprofit corporations differ from S corps, C corps, or LLCs because nonprofit corporations are not taxed at the state or federal level.

Internal Links:

• Filing LLC Taxes