When you're starting a business, you must decide which entity type best meets your goals. Most entrepreneurs register their business either as a limited liability company (LLC) or a corporation. While consulting a business law attorney can help shed light on these options, it is in your best interest to know some facts in advance.

What Is a Limited Liability Company?

An LLC has some of the characteristics of a partnership and a corporation. LLC owners are called members and each owns a specific percentage of the company. LLC members can either actively run the business or be silent investors while entrusting the company's operations to a manager. Transferring membership in an LLC is more complicated than moving shares in a corporation.

An LLC is also considered a pass-through business wherein the company's revenue is treated as the owner's income and taxes are paid through the owner's tax return. Multi-member LLCs are taxed like partnerships. Single-member LLCs, on the other hand, are taxed as sole proprietorships.

How Does a Corporation Differ From an LLC?

Companies with an "Inc." after their name are registered as corporations. A corporation has a board of directors that oversees the company and lays down its policies. Instead of members, a corporation has shareholders who receive stock shares, which they can easily transfer to another owner.

In terms of taxation, businesses classified as C corporations pay taxes at the corporate level. Therefore, profits and losses don't pass directly through the owners. S corporations are taxed as pass-through entities, so shareholders pay taxes on their profit shares. 

While LLCs and corporations are different, they both offer business owners limited liability protection. This means that owners or shareholders have restricted liabilities when it comes to business debts and lawsuits. A qualified business law attorney can further explain the advantages and drawbacks to help you make an informed choice.

 
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