Business owners in California may be advised to start a corporation instead of a company. LLC stands for limited liability company, not cooperation as is often implied. It helps to understand the differences between LLCs and corporations.
What LLCs and corporations have in common
A corporation and LLC must limit investor or shareholder liability from business debts and litigation. In other words, limited liability means that the investor is only liable to the amount of their investment. To maintain liability, the business must separate the business activity from an investor’s activity, often referred to as a corporate veil. Otherwise, investors can be held liable for the debts and actions of the business.
The differences
One main difference between LLCs and corporations is the formation. State law requires a business organization to register under a certain type of business.
LLCs commonly include one owner or multiple business owners. Multiple owners decide on the percentage of ownership that each member gets and daily activities using an operating agreement. They also file Articles of Organization in the state.
A corporation forms with the filing of corporate documents, including selection of a board of directors and establishment of bylaws. Members of an LLC have made investments to be part of the company that gives them equity interest while corporate owners tend to have stock in the business. The members of an LLC hold profits and losses while a corporation holds the profit and losses.
As for taxes, a corporation only pays taxes for itself, which is a 21% tax rate. Under an LLC, the investor pays taxes on their share of the company earnings on the personal tax returns. For example, if the company profited $100,000, the members pay based on the initial agreement. A single-member LLC uses Schedule C to report taxes on their personal tax return.
Business tax laws can be tricky. If a business owner isn’t sure about taxes or what structure of business to start, a business law attorney may be able to help them.
