LLC vs Corporation

What is the Difference between an LLC and Corporation?
The first major decision for any new business owner is, “how do I protect myself legally?” Whether through a google search or a discussion with a friend or lawyer, a new owner inevitably hears about limited liability companies and corporations. Since both offer the liability protection every business owner seeks, which option is best? What are the benefits? Drawbacks?

What is a Corporation?
A corporation is the traditional business model of choice. Simply put, a corporation is a legal entity owned by shareholders, controlled by the board of directors, and managed by the officers (though technically, one person could wear all three hats). A corporation allows individuals to pool their resources (capital, IP, etc.) in order to generate a profit while also providing protection for its shareholders. Because a corporation is a separate legal entity, individuals are protected and a shareholder won’t lose their house to pay the corporation’s debts.

What is a Limited Liability Company?
A Limited Liability Company (LLC) is a fairly new entity that blends the liability protection of a corporation with the tax benefits of a partnership, making it a top pick for many new business owners. Instead of shareholders, an LLC is owned by one or more members. It is less formal than a corporation (formed more by contract than statute) and is not required to have a board of directors or officers. The benefit to an LLC is you can (more or less) structure the business however you want.

So, what entity type should I choose?
When deciding which entity is best for your needs, consider the following:

  • Taxation: Corporations are subject to double taxation. This means the corporation’s profits are taxed, and, when paid to shareholders, the shareholders are taxed. An LLC, on the other hand, is only taxed at its member level (its called a pass-through entity).
  • Organizational Formalities: Corporations are subject to a more rigid organizational structure and are required to follow formalities imposed by the law, such as the Oregon Business Corporation Act. If you fail to hold an annual meeting you may lose the protection of being a corporation. A limited liability company is not subject to these formalities and is far more relaxed and flexible.
  • Fundraising/Mergers: For those start-up companies looking for investment money, venture capital firms have shown reluctance to invest in LLC’s and have historically preferred corporations. If you initially form as an LLC and later convert to a corporation, you will incur additional costs.

The answer is it really just depends…
Ultimately, the decision to become a corporation or limited liability company will depend upon the individual needs and goals of the company and its founders, but remember to ask yourself the following questions: What are my long and short term goals for the business? How much money to I anticipate passing through the business? Will I seek venture capital money? Do I need more flexibility in the way my business is managed? How many owners are involved in this new business? Your answers will help decide the best choice.

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