When it comes to forming a business, there are several different legal structures to choose from, each with its own advantages and disadvantages. Two of the most popular business structures are corporations and limited liability companies (LLCs). While both of these structures offer liability protection for their owners, there are some important differences between the two that should be considered before making a decision.

Ownership Structure: One of the primary differences between a corporation and an LLC is their ownership structure. Corporations are owned by shareholders who elect a board of directors to make major decisions on behalf of the company. In contrast, LLCs are owned by members who have the flexibility to manage the company themselves or to appoint managers to do so.

Tax Treatment: Another important difference between corporations and LLCs is their tax treatment. Corporations are considered separate entities from their owners and are subject to double taxation. This means that the corporation must pay taxes on its profits, and then the shareholders must also pay taxes on any dividends they receive. LLCs, on the other hand, are considered pass-through entities for tax purposes. This means that the profits and losses of the business are passed through to the members, who then report them on their personal tax returns.

Liability Protection: Both corporations and LLCs offer liability protection for their owners.  With both a corporation and LLC, owners are generally not personally liable for the debts and obligations of the company. However, if they fail to maintain formalities, violate their fiduciary duties, engage in misconduct or illegal activities, they may be held personally liable for any resulting damages. 

Formalities: Another difference between corporations and LLCs is the level of formality required to operate. Corporations are required to hold regular meetings of the board of directors and shareholders, keep detailed records of these meetings, and follow specific procedures for making major decisions. LLCs, on the other hand, are generally more flexible and require less formalities. While it’s still a good idea to have an operating agreement in place, there are fewer formal requirements for managing an LLC.

Ultimately, the decision between forming a corporation or an LLC will depend on the specific needs and goals of your business. If you’re looking for a more formal structure with clear lines of authority and double taxation isn’t a concern, a corporation may be the right choice. However, if you’re looking for a more flexible structure with pass-through taxation and strong liability protection, an LLC may be a better fit.

Consult with our office and an accountant to help you make the right decision for your business.  Schedule a free consultation today: https://calendly.com/alessahuber/15min

Disclaimer: This information is educational only and not intended as legal advice. If you need legal advice, contact Cooper & Huber (949) 209-2860 to discuss further.

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