1. How is an LLC different from a corporation?An LLC and a corporation are both legal entities under state law. Both entities also provide their owners with the same level of limited liability protection under state laws. However, the LLC is a different type of legal entity. A corporation is an incorporated legal entity which has specified corporate features such as stock a stock ownership structure, an established governance structure (Board of Directors), and imposed corporate formalities required for running a corporation. An LLC provides a much simpler governance structure and does not legally require that the LLC comply with as many formalities as a corporation. The LLC also allows the owners of the LLC to decide amongst themselves how they want their LLC to be governed and operated. Accordingly, the LLC is a much more flexible structure to accommodate any small business. An LLC by default is also taxed differently from a corporation. However, another benefit of an LLC is that the owners can choose to have the LLC taxed as a corporation. What this means is that the LLC can take advantage of all the state law benefits of an LLC over a corporation and, if, a corporate tax structure is best for a specific situation, the LLC can also benefit from choosing among both tax structures. |
2. Which is better for my business- a corporation or an LLC?The answer to this question depends on the facts and circumstances of each business situation. Only a professional adviser such as an attorney or CPA accountant can help you with this after learning all the details of your business endeavor. The number of LLCs formed each year for small businesses now greatly surpasses the number of corporations formed each year. This is because the LLC was specifically created to offer all the benefits and advantages or corporations and partnerships but without the disadvantages of those other entities. While there are situations where a corporation is preferred, the LLC has generally been the entity of choice for most small business. One area where there is a lot of misconception is the area of taxation. Some CPAs may recommend a C corporation or an S corporation for tax purposes in particular situations. But many of them do not know that an LLC can elect to be taxed as a C corporation or an S corporation. In other words, if the reason to choose a corporation over an LLC is tax driven, please know that you can still form an LLC and get all the state law advantages and also elect to have your LLC be taxed as a corporation for income tax purposes. Make sure that your chosen CPA is up to date on LLCs and their tax benefits as you will often find they are not . . . choose one that is. This choice alone can save you lots of money! |
3. Can I convert a corporation to an LLC?The answer to this depends on your state's specific LLC laws. A state's LLC laws must have a specific conversion provision in order for a corporation to convert to an LLC. Conversion provisions will have specific requirements and filings. If a state's laws do not have a conversion provision, then the other ways for you to move your corporate business into an LLC are to either (i) form an LLC and transfer all of the assets of the corporation to the new LLC; or (ii) form an LLC and merge the corporation into the LLC under your state's merger laws. There may be tax consequences in any of the above mentioned circumstances so please consult with your advisers to determine the best method for accomplishing this business entity switch. |
4. What are the benefits of an LLC generally over a corporation?The LLC was specifically created to cater to small business as a business vehicle. LLC benefits over corporations include lesser formalities and required maintenance, more operational and governance flexibility and more tax choices. |
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