USA LLC v Corporation

If you are starting a company in the USA, the first step is to compare a LLC with the Corporation, whilst a Limited Liability Company and Corporations share many qualities, they also have distinct differences.

LLCs and Corporations have in common:

  • Limited liability protection - Shareholders are typically not personally responsible for business debts and liabilities
  • Separate entities - Both are separate legal entities created by a state filing
  • Pass-through taxation - Both typically allow pass-through taxation, and while Corporations must file a business tax return, LLCs only file business tax returns if the LLC has more than one owner. With pass-through taxation, no income taxes are paid at the business level. Business profit or loss is passed-through to the shareholders personal tax returns.

Differences in ownership

Ownership - The Internal Revenue Service restricts S Corporation ownership, but not that of limited liability companies. IRS restrictions include the following:

  • LLCs can have an unlimited number of members;
  • S Corporations can have no more than 100 shareholders
  • Non U.S. citizens can be members/shareholders of LLCs
  • S Corporations may not have non-U.S. citizens/residents as shareholders

Ongoing formalities - S Corporations face more internal formalities. LLCs are recommended, but not required, to follow internal formalities.

  • Required formalities for S Corporations include: Adopting bylaws, issuing stock, holding initial and annual director and shareholder meetings, and keeping meeting minutes with corporate records.
  • Recommended formalities for LLCs include: Adopting an operating agreement, issuing membership shares, holding and documenting annual member meetings (and manager meetings, if the LLC is manager-managed), and documenting all major company decisions.

Differences in management

  • Owners of an LLC can choose to have the members or managers to run the LLC. When members manage an LLC, the LLC is similar to a partnership. If run by managers, the LLC more closely resembles a corporation; members will not be involved in the daily business decisions.
  • S Corporations have directors and officers - the board of directors oversees corporate affairs and handles major decisions but not daily operations.

Other differences between LLCs and S Corps:

  • Existence - An S Corporation’s existence is perpetual and only certain events, such as death of a member, can cause the LLC to dissolve.
  • Transferability of ownership - S Corporation stock is freely transferable, as long as IRS ownership restrictions are met. LLC membership interest (ownership) typically is not freely transferable—approval from other members is often required.

Limited Liability Companies (LLC)

A LLC is a type of partnership and is different to a Corporation for the following reasons:

  • A Corporation has Shareholders as owners. The LLC has Members.
  • A Corporation has Directors. The LLC has Managers.

In the annual state tax form for a Corporation you must include:

  • Director name and address.
  • Principal place of business outside of Delaware.
  • Nature of business.

Any profits or losses are passed to the members of the LLC to report on their personal income tax - therefore the LLC does not pay any income taxes.

General procedures after you receive filed Articles of Organisation:

  • Create an LLC operating agreement, which sets out the rights and responsibilities of the LLC members.
  • Issue membership certificates to members.
  • Apply for EIN - Tax ID number.
  • Establish a LLC bank account.
  • File initial list of Managers or Members. This has to be done within 30 days after incorporation date.