Which is Better, A Corporation or LLC?

December 07, 2009

Which business entity is better, an LLC or a corporation? Knowing the difference could save you a lot of heart ache!

Corporations and LLC’s are business structures that act like a person. When creditors come knocking at the door they can only get the assets of the corporation, not those who own the shares of the corporation. While no one plans on having aggressive creditors when they form a new company, in today's climate it can easily happen.

Knowing the difference could save you a lot of heart ache!

In addition, both a corporation and an LLC provide for division of ownership. While a partnership presumes at lest two owners, the partnership is not protected against its creditors. Corporations are frequently owned by a single owner or a single family.

In the old days a company of any size incorporated. The benefits were the company could divide it’s self into a variety of parts. If the company hit it big then those parts could be listed and sold on the stock exchange or divided by friends or family. In the event the company went belly up, filed bankruptcy, the owners of the company could only lose the value of their ownership in the company, or their shares.

Corporations had some fundamental problems

Corporations had some fundamental problems. First, the tax structure of the corporation was hostile. Because the corporation is a separate entitly, it was taxed twice. First the corporation was taxed at the 'corporate level', usually at fairly high rates. Once the profits were paid to the shareholders each share holder was taxed again, hence double taxation.

A subchapter S corporation was created in which the share holders were taxed only once, when the profits were given to the share holders. However, a Sub S, as they are called, has limitations. For example, all of the share holders must be US citizens or the Sub S status goes away.

Partnerships were generally taxed only once, when the profits were paid to the partners. The problem was, all of the partners had equal liability for partnership debts . If the creditors came looking for money, if they could not get the money from one partner they could get it from any other partner who had the bucks. In short, partnerships had better tax benefits, but left the owners open to liability. What to do?

an LLC is generally taxed only one time, when the partners share in the income

A new entity was created called a limited liability company. An LLC is a partnership in which the liability of the partners is limited to the initial investment of the partners. At the same time, an LLC is generally taxed only one time, when the partners share in the income

When to use the various entities?

Unfortunately, LLC law is new law. While the concept is accepted in nearly every state in the union, it may not be applied the same in every state. Therefore, if a company plans to do business out of state, they might be better off with a corporation. On the other hand, a company that plans to do business only in one state should consider the LLC business structure.

If you are planning to open a new company the best thing to do is consult an attorney in your state.

The decisions are not always easy to make. For example, a bar which by its nature is located in only one state may be construed as doing business in many states. Let’s say a gal gets drunk in the Four Corners area of the US. She then drives into four different states killing pedestrians in each state. Even though the bar does not do business in four states, it may have to defend lawsuits in four states. Each state may have different ways of interpreting the LLC structure.

If you are planning to open a new company the best thing to do is consult an attorney in your state. Articles like this should never be taken as legal advice, as they are general. Specific situations differ. Rather, it is a place to start in your research for a new company.

Good luck to you, and if you open a bar, have a scotch on Uncle Tim!

Tim Paynter is an attorney, civil rights leader and advisor for the consumer and small business person. If you want legal advice in Colorado he would love to consult with you. If you want legal advice in another state be sure to find a competent attorney.