What is the difference between a corporation and an LLC?

Both corporations and LLCs will offer limited liability for their owners, so often the decision between the two types of organizations is driven by tax considerations. LLCs usually act as “pass through” entities for tax purposes – meaning that the profits and losses of the entity are passed directly to the LLC members. In contrast a corporation is a “blocker” in that it is a separate entity for tax purposes and its profits and losses are not directly passed through to its shareholders.

Either type of entity can be used to conduct U.S. operations and can provide the protections of limited liability for its owners. However, many find corporations to offer the following advantages:

1. For tax purposes a corporation is a separate tax-paying entity, while an LLC (subject to some complicated exceptions) is a “pass through” entity for tax purposes – its profits and losses are attributed to its members, potentially subjecting them to direct taxation.
2. If you expect to involve outside investors in the future, many types of investors will not be interested in (or may be legally barred from) investing in LLCs because of the income and loss pass-through nature.
3. The management structure of an LLC is not as clearly defined as a corporation – it does not have a well-known structure established and regulated by law, as does a corporation: no Board of Directors, no officers like a President, CEO, Vice President(s), Treasurer, Secretary, etc. A well-recognized internal management structure is important for structuring and controlling the company and its team.
4. Transfer of ownership interests in an LLC may be more complicated compared to shares of a corporation -- especially if there will be more than one class or type of ownership interests. An LLC does not normally issue any written evidence of ownership, like shares. It can issue ownership interest certificates, but that will have to be specified in the Operating Agreement.