LLCs vs. Corporations: A Brief Overview

Please note: The following does not constitute legal advice. Rather, it is designed to provide a very general overview of the differences between corporations and LLCs. Rules and regulations can vary from state to state. For guidance and/or recommendations for your circumstances, consult an attorney. 

About LLCs:

Basic Overview
In general, LLCs are the more modern and flexible form of business. They have fewer requirements than corporations, meaning there's no need for corporate minutes, bylaws, annual shareholders meetings, etc. Plus, unlike S Corporations, non-resident aliens can be shareholders of an LLC.

Also, while LLCs offer the same liability protection as corporations, they are taxed similar to sole proprietorships or partnerships, which eliminates a corporate income tax. Instead, income and/or losses form the LLC are passed through to the owners on the personal level.

Many people choose LLCs due to the flexibility and ease of maintenance. However, some states have legal publication requirements for LLCs (i.e. NY, NE, AZ) which can add costs. For example, in New York, new LLCs can expect to spend an additional $300 to $1300 on legal publishing alone. In other states with this requirement, the cost will likely be much less than that, but it remains something to consider.

About corporations:

Basic Overview
In general, corporations are the more traditional form of business. Many investors would still rather invest in a corporation due to the more rigid rules regarding structure and governance. However, because of this additional regulation, corporations must deal with formalities such as corporate minutes, bylaws, and annual shareholders meetings.

In addition, unless a Subchapter "S" election is made, owners of corporations are subject to a double tax (once at the corporate level and once at the personal level). Making a "Subchapter S" election avoids taxes at the corporate level, so earnings are taxed only once at the personal level. Thus, income and losses are "passed-through" to the shareholders, usually resulting in considerable tax savings. However, be aware that no shareholder of an S Corp can be a non-resident alien. There are also restrictions on the number of shareholders in an "S" Corp.

As always, check with a lawyer and/or accountant before making your final decision. 

Comparison chart:

Choosing your state:

For the vast majority of people, we have found that incorporating in your home state (where your business is located) is the best way to go. Don't fall for the "Delaware Myth" which causes many people to form out of state, resulting only in headaches and lots of extra costs, with no real advantages. You can read more about this here.

As always, check with a lawyer and/or accountant before making your final decision.

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