What Is the Difference Between an LLC and a Corporation?

 Posted on August 19, 2024 in Business and Commercial Law

Starting a business can be an exciting undertaking. It begins with a brilliant idea, then takes shape as a team is assembled, a business plan is created, and a location is found. However, an aspect that is sometimes overlooked is the legal formation of the company. How you establish the entity is a decision that can have long-lasting consequences for the business.

Two of the most popular types of entities are a limited liability company (LLC) and a corporation. Both are designed to shield their owners from legal liability so that their assets are not in jeopardy if the entity fails. However, there are significant differences between the two formations, which this article will discuss. To determine which option is best for your business, consult a Texas business formation attorney.

Ownership

One of the main differences between an LLC and a corporation is the ownership. An LLC is directly owned by one or more of its members. A corporation, on the other hand, is owned by shareholders. The shareholders appoint a board of directors, which in turn appoints the corporation’s officers.

Taxation

Taxes present another significant difference between an LLC and a corporation. An LLC is considered a pass-through entity, which means that the profits and losses of the business are passed through to its owners who can claim that income or loss on their personal tax returns. On the other hand, a corporation must pay a corporate tax in addition to the owners paying taxes on their dividends from the company.

Keep in mind, however, that members of an LLC may be subject to higher taxes for self-employment.

Formalities

Corporations are subject to legal formalities that LLCs are not. For example, a corporation must:

• Draft corporate bylaws
• Appoint a board of directors
• Hold annual meetings and keep records of meeting minutes

An LLC may choose to draft its own bylaws — referred to as an operating agreement — and hold annual meetings, but it is not legally required to do so.

Capital

An LLC can be more limited when it comes to raising capital because, unlike a corporation, it cannot issue stock. Instead, it is limited to generating capital through private investments. A corporation, on the other hand, can secure investments from private individuals as well as from the public by selling shares.

Contact a Hill County, TX Business Formation Attorney

There are several differences between an LLC and a corporation, making each suitable for different purposes. LLCs, for example, are usually ideal for smaller businesses that need the flexibility and informality that an LLC formation allows. However, there are several other types of entities you can form in Texas which may suit your needs. At Cain & Kiel Law, our experienced attorneys are ready to help you form a company that will maximize your business’ success. Call 817-645-1717 to speak with a Tarrant County, TX business formation lawyer today.