Why Choose an
LLC Over a Corporation

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Summary:

• Corporations and limited liability companies (LLCs) are different types of business entities.  Both offer limited liability protection from creditors.  For the reasons outlined below most small businesses will end up choosing to be an LLC

What is an LLC?

• LLCs are essentially partnerships that enjoy limited liability similar to a corporation, except:


• In an LLC the "partners" are called "members" (unlike a true partnership an LLC can have a single member).


• In an LLC the "partnership agreement" is called an "operating agreement".

LLCs Are Simpler to Maintain than Corporations:

• Unlike a corporation, LLCs have no requirement for a board of directors, bylaws, minute book, etc.


• LLC's are governed by an operating agreement.  As with true partnerships, LLC members must reach an agreement on things such as the required investments of each (if any), profit split, percentages of ownership, management, the mechanisms for handling the death, expulsion or withdrawal of a member, etc.

Tax Flexibility

• There is no tax disadvantage to being an LLC as opposed to a corporation because an LLC can elect to be taxed as a corporation (either as a "C corp" or an "S corp").


• Single Member: By default, the IRS treats a single member LLC as a "disregarded entity"
• Multi-Member; By default the IRS treats multi-member LLCs as partnerships.

Management Flexibility

• The LLC's Operating Agreement can authorized all of the members to share management responsibility or it can appoint one of the members to be the "manager"

LLC Limited Liability
(from creditors of the company)

• Unlike true partnerships the members of an LLC enjoy the same type of limited liability protection that is enjoyed by stockholders of a corporation.


• As a practical matter LLC's often offer better protection from liability than a true corporation because there are far fewer "formalities" that must be complied with (no need for boards of directors, minute books, bylaws, etc).

Better Protection of Company Assets
from Creditors of an LLC Owner

• With true corporations creditors of an owner can get the courts to seize that persons stock in the company (thus giving the creditor ownership of the company)


• That is not true with multi-member LLCs.  Someone with a money judgment against a member can NOT seize that person's membership interest in an LLC.  All the creditor can do is get the court to issue a "charging order" seizing any monetary distributions that might (or might not) be made by the LLC to the member.  This added protection, however, is not available in single-member LLCs.

Is There Any Reason to Form a Corporation?

• Because of the LLC advantages outlined below typically the ONLY reason someone would want to form an actual corporation would be to have the ability to issue stock certificates to accommodate multiple investors.

Staying Out of Trouble with an LLC

• The business of the LLC must be kept legally distinct from the business of the members.


• It is important that an LLC have it own bank account opened in its own name.


• A separate bank account makes it easier to track company's income and expenses, thus, making it easier to compute and pay taxes for the business.


• The members of an LLC should never pay the LLC's debts with their own personal credit cards or checking accounts.


• If the LLC needs money to pay a bill, the member can make a "capital contribution" to the LLC by depositing money into the LLC's account so as to allow the LLC to then make the payment.  Violating this rule might result in the member being found personally liable for the LLC's debts if a creditor ever decides to file a collection lawsuit.