Choosing the Right Business Structure: LLC vs. Corporation
Whether you are starting a business or restructuring an existing one, choosing the right entity structure is a critical first step. A corporation and a limited liability company in Montana differ in several key aspects, including but not limited to: formation, taxation, liability, and operational structure. So which one is right for you and your business?
What is an LLC?
A Limited Liability Company (“LLC”) is a legal entity formed by signing and filing articles of organization with the secretary of state. An LLC is often governed by its operating agreement which is executed by its members. An LLC is a flexible business structure that combines elements of a corporation and a partnership and is the structure most often considered by small business owners due to its limited formal requirements and overall flexibility. LLCs can either be managed by Members or by appointed Managers and LLCs have fewer formalities like no need for annual meetings or minutes (although they are recommended) and are generally easier to maintain.
What is a Corporation?
A Corporation is a more formal legal entity formed by filing articles of incorporation with the secretary of state. A Corporation is governed by Bylaws, shareholder agreements, meeting minutes and resolutions. A corporation’s ownership is represented by shares of stock which are owned by individual shareholders and is operated by its board of directors and officers. A corporation is subject to much stricter rules than an LLC, including regulatory and reporting requirements like holding annual meetings, recording minutes and filing annual reports.
LLC vs. Corporation: Side-by-Side Comparison
Liability protection:
Corporations and LLCs provide similar limited liability protection in that both entities tend to shield owners from personal liability for business debts, lawsuits, or other obligations. However, that protection weakens when either entity is not properly maintained at which point there is a higher risk for “piercing” the veil of protection. Examples of risks include: no operating agreement, commingling of business versus personal funds, or a lack of adherence to strict corporation compliance.
Taxation:
Corporations may elect to be taxed as either a C-Corporation or an S-Corporation.
C-Corporations (“C-Corps”) is the default tax election of a corporation, where a corporation is taxed on its profits at the federal and sometimes state levels. A C-Corp distributes profits (dividends) to shareholders, where the shareholders pay personal taxes on profits received, or “Double Tax”. There are no ownership restrictions for C-Corps, and this model is often used by large businesses planning to raise venture capital or go public.
S-Corporations (“S-Corps”) is a tax election wherein the corporation will be taxed similar to a partnership, that still allows for pass-through taxation (no corporate tax), but also helps save on self-employment tax. This avoids the double taxation faced by C-Corps. To elect to be taxed as an S-Corp, a corporation must meet much more strict eligibility requirements. Specifically: There can be no more than 100 shareholders; those shareholders must be U.S. citizens; the shareholders must be individuals; and there can only be one class of stock.
An LLCs key attraction is its ability to be taxed as a “pass through” entity, wherein profits and losses pass to its members’’ personal tax returns.
Management structure:
The management structure of a corporation versus an LLC differs primarily in terms of formality and flexibility. An LLC may be either member managed or manager managed, whereas a corporation is made up of shareholders, with officers and a board of directors. The corporation is further required to be maintained through formalities like annual meetings, bylaws, minutes, whereas an LLC is recommended to have an operating agreement, but it is not legally required, and it may file an annual report, but with fewer requirements than a corporation.
When to Talk to an Attorney
Whether you are deciding what kind of a business entity is right for you, or working on business restructuring, reach out to KLH Advisors to consult with one of our attorneys on which entity formation or structure current and future goals.
Why work with KLH Advisors
Choosing to work with KLH Advisors, whether it is entity formation or restructuring can make a significant difference in the outcome and the experience. KLH Advisors is knowledgeable in the process, our attorneys are ready to help you make informed decisions for your business you can trust.
