Tuesday, February 10, 2015

LLCs v. Corporations

Both LLCs and Corporations can be utilized as part of an integrated estate plan to provide additional protection, flexibility and perpetuity.  It is important to know the primary differences between an LLC and Corporation so that you can choose which type of entity will best help you achieve your business and estate planning goals.  Three of the primary differences between LLCs and Corporations are the following: differences in flexibility, differences in management structure, and different treatment for tax purposes.

1.      Flexibility.  Corporations are defined by statute, LLCs are defined by contract.  Corporations are rigidly defined and must meet numerous formalities to satisfy statutory requirements to protect assets, while LLCs are more flexible in nature as the members of the LLC write the contract by which the LLC is governed.

2.      Management Structure.  Corporation management is vested in its Board of Directors.  Each Director has one vote and the Board sets policies to be executed by the Officers on day to day basis and have the responsibility to govern the company.  An LLC’s governing structure is based upon its Operating Agreement.  The default organizational structure of an LLC is that all members of the LLC have an equal right to participate in management, but the members can agree to have a member-managed or manager-managed LLC.  In a member-managed LLC all the members of the LLC share responsibility for the day-to-day running of the business.  This structure usually works best for small businesses.  In a manager-managed LLC, a manager is chosen by the members to oversee the running of the business and the members almost act as a corporate Board of Directors in that the members delegate management responsibilities to a manager.  A manager-managed structure typically works best in a larger business where a separate management level is desirable or some members of the LLC want to be passive investors.

3.      Tax Treatment.  Corporations are subject to ‘double taxation.’  When a person sets up a corporation, he or she is taxed on both the corporate and the individual level.  However, a corporation can avoid double taxation of corporate profits and dividends by electing Subchapter S status.  An LLC typically allows for ‘pass-through’ taxation, wherein profits and losses typically pass through the LLC and get reported on the personal income tax returns of the owners.  Additionally, an LLC can elect to be taxed as a C or S corporation depending on the tax objectives of its owners. 

There are various reasons to choose forming a corporation versus an LLC and vise versa, not the least of which are flexibility, management and tax treatment.  To determine whether a corporation or LLC should be a part of your integrated estate plan and which type of entity will best help you achieve your business and estate planning goals, come in and speak with one of the knowledgeable attorneys at JEFFREY BURR.

-Attorney Rebecca J. Haines

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