The biggest risk of conducting a business is having to sacrifice your personal assets to cover up the debts of the business in case of liquidation. If you are bound to have unlimited liability to your business or in other words if your business is a sole proprietorship or a partnership, this is going to be the case. However the owners of both LLCs and Corporations can avoid this risk as they have only limited liability to the company.
Let us now move on to the relative advantages and disadvantages of an LLC compared to a Corporation.
Advantages
Setting up an LLC is easier and much faster than a corporation. For instance an LLC only requires Articles of Organization or Certificate of Formation and Operating Agreement to initiate. However in the case of a corporation Articles of Incorporation, Bylaws, Organizational Board Resolutions, Stock Certificates and Stock Ledger (even IRS & State S Corporation election for S corporations) should be in place to form a corporation.
Further an LLC is free from other formalities of a corporation such as annual general meetings which can be quite costly.
An LLC has the eligibility to pass through the corporate profits and losses to the individual shareholders unlike general corporations. This means it can avoid double taxation as the income of the shareholders will be individually taxed but not the profits of the business. However unlike general corporations, S corporations are eligible to avoid double taxation similar to LLCs.
The LLC shareholders have the luxury of dividing its profits according to their own discretion. However a corporation can only declare dividends based on the number of shares held by each shareholder regardless of the amount of effort put into the business.
Disadvantages
Limited access to additional finance as these companies are not eligible to issue shares. Issuing shares is one of the best ways of accessing public money. This is especially useful if you need a large sum of money to finance your growth strategies.
The empirical studies show one of the most effective ways of retaining your key employees within your organization is through the provision of stock options. However as LLCs can not issue shares they are unable to offer their employees this benefit.
Limited Liability Companies are sometimes at a disadvantageous position as these are not perceived as professional as corporations by the potential customers. Further due to relatively lenient financial controls compared to corporations, required by the legislation, there is a higher possibility of fraud and error occurring. As a result LLCs are more frequently audited as opposed to corporations
You cannot form an LLC at anywhere you wish. For instance the state of California does not allow LLCs to be formed within the state. So if you intend to form an LLC please verify the possibility with reference to the state law.
As discussed above there are pros and cons of selecting LLC over Corporation as your legal business structure. It is therefore your duty to analyze the relative merits and de-merits of both these options and select the one which is more suitable, feasible and acceptable to you.
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