Every business has a structure or an entity type. So, one business might be a professional corporation, another might be a sole proprietorship. When it comes time to choose the structure your business will use, it’s important to distinguish between entity types. After all, there are advantages and disadvantages to each. One of the most common business entities is the limited liability company or LLC. Another is the corporation. Though similar, there are some important distinctions that we’ll discuss in this article. Books have been written dealing with the distinctions between these entity types so this article is only intended to start a conversation. You should consult with an experienced attorney before proceeding.
What do an LLC and a Corporation Have in Common?
As we just mentioned, they are both types of business entities. In structure, LLCs are similar to both partnerships and corporations. LLCs can be manager-managed, meaning that it is controlled by the chief manager/president. LLCs can be member-managed, meaning that it is controlled like a partnership where all members have an equal vote. LLCs can be board-managed, which looks an awful lot like how corporations are managed. Corporations are controlled by the Board of Directors. The Board of Directors are voted on by the shareholders. The Board of Directors actions are implemented by the officers i.e. president, treasurer, secretary.
LLCs and corporations are formed differently. A Minnesota LLC files Articles of Incorporation with the Minnesota Secretary of State. In Minnesota, new corporations file Articles of Incorporation, also with the Minnesota Secretary of State.
However, corporations may form as business (for profit) or nonprofit corporations. Also, financial corporations like banks, savings associations, and insurance companies file with the Minnesota Department of Commerce instead of the Secretary of State. Formation is normally accomplished through the filing of articles of organization or articles of incorporation. While it is easy to legally create such an entity (you simply file a form with the appropriate governing body) the nuances of formation can be a trap for the unwary. For example, if an entity is legally created by articles of incorporation but has not created bylaws, subscription arrangements or meeting minutes of both the board and the shareholders, it is susceptible to veil piercing theories from creditors. Additionally, there are many asset protection and income tax mitigation opportunities at formation that are missed by inexperienced professionals or lay persons.
An LLC may elect to have the IRS treat it as a corporation for federal tax purposes. If no election was filed, the LLC files federal income tax returns as follows:
- If the LLC consists of multiple partners, it is treated as a partnership.
- If there is only one member, the member/owner reports income derived from the LLC on his or her personal tax return.
Corporations, by default, are “c corporations.” The corporation’s net profits are taxed, as well as the shareholder’s income from the corporation. Some corporations may elect to be S corporations, which means the company is a “pass-through entity.” This requires an affirmative filing with the Internal Revenue Service within set and specified time periods. Similar to the LLC, the S corporation itself is not taxed. Instead, the owners report income on their personal returns.
Corporations typically have a board of directors and officers. Shareholders own the corporation, but do not participate in management. LLCs can have a more informal management structure and depends largely on the type of LLC that has been formed. Owners may also run the day-to-day operations of the LLC.
Still Have Questions?
A properly formed entity will yield asset protection and tax benefits. At Virtus Law, we assist clients in developing comprehensive legal plans to address these opportunities. To schedule an appointment with one of our estate planning attorneys, contact us at 612.888.1000 or send an email to firstname.lastname@example.org. Our main office is in Minneapolis, with other offices located in Maplewood, Cambridge, Edina, Mendota Heights, and Red Wing.