What Is a Corporation, and How Does It Differ From an LLC?

A corporation is a separate legal entity owned by shareholders, while an LLC offers flexible management and pass-through taxation. Corporations require stricter compliance and structured oversight, whereas LLCs provide fewer formalities and adaptable ownership structures.

By Douglas Wade, Attorney

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Table of Contents

1. What makes a corporation different from an LLC?

2. What are corporations?

3. What is the definition of a company?

4. Companies vs. corporations

5. Differences between a corporation and an LLC

6. How to decide between a corporation and an LLC

What makes a corporation different from an LLC?

Organizations and businesses can take several forms. The organization and components of a company’s operations are important factors to think about while evaluating, joining, or starting a firm. To better comprehend the inner workings and applicable standards of an organization, it is helpful to first examine the key distinctions between a corporation and a company.

This article explains what a corporation is and how it differs from a company, as well as providing a list of those differences.

What are corporations?

Unlike its owners or founders, a company is a separate legal body that exists independently. Anyone with shares or stocks in the company is considered an owner. By law, corporations are considered to be a single person or entity with all the rights and responsibilities that comes with that status. Among the various types of corporate structures are:

C corporation: When a company is formed as a C corporation, its owners or shareholders file taxes independently of the company.
S corporation: If you file your business as a S corporation, you can pass your owners your profits, losses, discounts, and credits. As a result, the shareholders can treat the company like a general partnership when filing their taxes.

What is the definition of a company?

Anyone engaging in commercial business activities with the primary objective of making a profit is considered to be part of a company. The term “company” lacks a specific definition, regulation, and authorization in the legal system. Corporations are always considered to be companies, although not all companies are considered to be corporations. A wide variety of organizational forms fall under the umbrella word “company,” including:

Sole proprietorship: In a sole proprietorship, there is only one person running the business. A sole proprietorship is a type of unofficial business entity in which there is just one owner.
General partnership: A general partnership looks and works like a sole proprietorship, but it has two or more people working together to run the business. Each partner is personally responsible for their share of the company’s debts and obligations, as well as any wrongdoing on the part of the other.
Limited liability partnership: In a limited liability partnership (LLP), each member is only personally liable up to a certain amount for the business’s debts and losses. In a typical partnership, each partner takes full responsibility for their own acts while avoiding blame for others.
Limited liability company (LLC): An LLC is a type of business that blends the features of different types of organizations. Although it has all the powers and privileges of a corporation, this business structure is subject to the same income and tax rules as a partnership or sole proprietorship.
Corporation: A corporation is a certain way of setting up a business so that it is its own legal body distinct from its owners. With the ability to produce and sell goods and services on a wider scale, corporations carry out the fundamental business operations.

Companies vs. corporations

A company’s or corporation’s internal policies and legal frameworks impact several aspects of its operations. A corporation differs significantly from a firm in several important ways, including the following:

1. Methods for managing

Management systems for corporations and companies are different. By making their stock and shares available to the public, corporations impose an obligation on its decision-makers to prioritize the needs of their stakeholders, both internal and external. Members of the board of directors, senior management, and stockholders are all considered stakeholders in a company. The stakeholders with a significant investment in the company want regular meetings, votes, and approvals because of the weight their stake has in the company’s management choices and operations.

Sole proprietorships, partnerships, and other forms of limited liability companies (LLCs) often do not sell shares to the general public and instead have a small group of internal stakeholders. Management is able to make choices autonomously and internally due to personal ownership of the firm. In a partnership, the owner and partners are fully involved in running the show.

2. Ownership

One of the activities that constitutes a corporation is the sale of stocks and shares to the general public. This establishes a system of public ownership. The bulk of a company’s voting power and decision-making authority rests with the shareholders who possess the most shares.

Typically, the public does not have access to a company’s share ownership, and the founders keep control and ownership of the business. The owners of a sole proprietorship or general partnership are also the owners of the business as a whole. The proprietors are therefore free to act in accordance with their own values and desires in making choices and organizing operations.

3. Filing taxes

In place of individual income taxes, the government mandates that all corporations register and pay taxes as business entities. Different types of corporations, such as C or S corporations, are subject to different sets of tax rules and procedures. Corporations are subject to taxes in their own right since, in the eyes of the law, they exist independently of their owners.

Companies of different sizes and organizational structures may be subject to different tax rates and filing requirements. It is usual practice for businesses to pay taxes on their income or to permit owners to declare and pay taxes on their personal income. Size, purpose, legal status, and income are some of the factors that determine which tax forms and laws apply to a certain business structure or kind.

4. Entities and legal standing

Corporations are public and impersonal legal entities that file and do business as such. Because of their position as a legal entity, corporations enjoy the same rights as individuals and are subject to the same safeguards under the law. People can learn about a company’s founding and formation via public records, and the company can portray itself as an entity distinct from its owners or founders.

Companies that operate as sole proprietorships or partnerships make use of an unseen legal entity. Though it may have the appearance of a legal body with its own set of rules and protections, the company’s status and creation are only formalities. The public’s perception of a company is based on its relationship to its owners.

Differences between a corporation and an LLC

Both limited liability companies (LLCs) and corporations (corps) are formed by submitting formation paperwork to the relevant state agency. Owners are shielded from personal responsibility in both cases. So, these businesses shield their owners from individual responsibility in the case of a lawsuit or bankruptcies because they are separate legal entities.

Corporations and limited liability companies are different in the following ways:

1. Ownership

An LLC is owned by its members. The term “membership interest” describes the fractional ownership that each member has in the company. An LLC can have either one or many members; the former refers to an LLC with just one owner. Individuals, businesses, other limited liability companies, and even foreign entities can all be members (though the exact number of members can differ by state).

Corporations, by contrast, are controlled by shareholders. In exchange for their financial or other assets, shareholders receive a proportional number of shares of stock in the company. A company can have as many stockholders as it wants.

2. Formation

A limited liability company (LLC) can be established by submitting a formal document to the Secretary of State, known as the articles of organization. Your limited liability company’s name, address, and member information are all detailed in the articles of formation.

A limited liability company operating agreement is recommended, but not necessary, in the majority of states. The operating procedures, distribution, and transfer of membership interests in the limited liability company (LLC) are detailed in this document. When a member decides to quit the LLC, the operating agreement ought to spell out the consequences. If this information is not included, then some states require that the LLC be dissolved upon a member’s departure.

Submitting articles of incorporation to the Secretary of State is the first step in forming a corporation. Your company’s fundamental information is included in its articles of incorporation, which are similar to articles of organization. There is a long list of requirements after filing with the state that do not apply to limited liability companies.

You must establish and approve corporate bylaws, choose a board of directors, and distribute shares of stock to shareholders in order to form a corporation. While limited liability companies (LLCs) make it difficult to transfer ownership of shares, corporations are able to continue operations even after a shareholder steps down. This is why corporations are the preferred choice of professional investors.

3. Oversight and continuing responsibilities for management

There is greater leeway for LLCs than corporations when it comes to administration and continuing needs.

The elected board of directors of a corporation oversees overall operations and selects officials to manage day-to-day tasks. There are a number of continuing obligations that corporations must follow, such as maintaining records, filing annual reports, holding shareholder meetings, and recording stock issuance and transfers.

On the other hand, limited liability companies (LLCs) can be governed by its members (this type of LLC is referred to as a member-managed LLC), or members can elect directors to operate the company. There aren’t many formal regulations for limited liability companies (LLCs), and although filing yearly reports is mandatory in most jurisdictions, it’s not necessary everywhere.

4. Taxes

The tax treatment of limited liability companies (LLCs) differs significantly from that of corporations. C-corporations are the default tax classification for corporations. Any gains made by the firm are subject to personal income taxes paid by the shareholders, in addition to corporate taxes paid by the business itself. Commonly, this is called double taxation.

For some businesses, the best tax strategy is to form an S-corporation and avoid paying taxes twice. The shareholders of an S-corp pay taxes on the earnings that flow through to their individual tax returns. But not every business can call itself an S-corp. There can be no more than one class of shares and no more than one hundred shareholders in a S corporation.

Limited liability companies (LLCs) have greater leeway in determining their tax treatment. The Internal Revenue Service does not assign LLCs a unique tax code. Rather, limited liability companies (LLCs) with one member are taxed as sole proprietorships, while LLCs with more than one person are taxed as partnerships.

The pass-through taxation that an LLC enjoys when taxed as a partnership or sole proprietorship helps it avoid double taxes. What this implies is that members get a cut of the company’s profits, which they then have to pay in taxes as income or self-employment. On the other hand, an LLC has the option to choose between C-corporation and S-corporation taxation policies.

How to decide between a corporation and an LLC

There are a lot of things to think about while deciding on a company structure. If you are looking to minimize formal rules, have no intention of seeking investor funding, and wish to avoid corporation taxes, an LLC might be the right choice for you. Conversely, if you want to sell shares, seek investors, or eventually go public, a corporation may be the best option for you.

For expert guidance tailored to your specific situation, it’s wise to seek the opinion of a business lawyer or certified public accountant.

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