What is the Difference Between an LLC and a Corporation?

One of the first steps when starting a new business is to decide whether you should form an LLC or a Corporation. Understanding the differences between the two will ensure the structure you choose for your business is the right one. There are five major considerations to take into account: Ownership, Management, Liability, Taxation, and Ongoing Compliance.

Ownership

The owners of an LLC are called “members.” Each member owns a “membership interest” in the LLC, which just refers to their percentage of ownership. The LLC has the flexibility to distribute the percentage membership interest to each member as it sees fit. There’s no requirement to distribute ownership evenly between the members. There’s also no requirement to have the membership interest reflect the member’s actual financial contribution to the LLC. Each member’s membership interest is outlined in the LLC’s Operating Agreement. If the LLC only has one owner, or member, it is a Single Member LLC, and the single member owns 100% of the LLC.

LLC members can be individuals, other corporations, or any kind of trust.

The owners of a corporation are known as “shareholders.” Shareholders can be individuals, institutions, or other corporations. The percentage of ownership each shareholder has in the corporation is reflected in the number of shares of stock assigned to them. Shareholders can transfer shares, purchase additional shares of stock to own a larger percentage of the Corporation or sell shares of stock to own less.

Management

LLCs can be managed by its members or a group of managers. In a member-managed LLC, the owners oversee the day-to-day operations of the business. In a manager-managed LLC, one – or a few people – run the business.