Should I Form a Corporation or a Limited Liability Company?

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What is a Corporation?

A corporation is a separate legal entity controlled by the shareholders of the corporation.   Shareholders nominate and select officers, such as CEO, CFO and Treasurer, to run the corporation.  A corporation must follow corporate formalities by holding annual meetings, keeping minutes and recording all share transfer transations.  More information on how to satisfy corporate formalities, see my previous blog entry

A corporation can be formed by filing a document called the Articles of Incorporation with the California Secretary of State.  A corporation can file IRS Form 2553 to become an s-corporation which allows the corporation to pass its income, losses, deductions and credit through to its shareholders for federal tax purposes.  For a s-corporation, the shareholders report the corporation’s income and losses on their personal tax returns and are taxed at their individual income tax rates.  A corporation that does not file IRS Form 2553 is called a c-corporation and it is subject to taxation at both the corporate and individual level (double taxation).

What is a Limited Liability Company (LLC)?

A LLC is a hybrid business entity that combines the characteristics of both a corporation and a partnership.  In California, a LLC can be formed by filing a document called the Articles of Organization with the Secretary of State.  A LLC is controlled by the LLC’s members and a set of rules called bylaws.  Similar to the protection afforded to the shareholders of a corporation, the personal assets of the members of a LLC are protected from liabilities incurred by the LLC.  However, there are three main advantages in forming a LLC instead of a corporation.  A LLC is not required to follow the same formalities as a corporation as there are no requirements of annual meetings, minutes and shareholder notifications.  There are also fewer restrictions about who can be a member because a LLC can be owned by individuals and business entities.  Lastly, whereas a corporation has to file IRS Form 2553 to avoid double taxation, a LLC can elect whether it will be taxed as a corporation or a partnership (similar to a S-corp).  One drawback is that a LLC is not permitted to provide any services which require a state professional license such as those belonging to doctors, lawyers or pharmacists. 

If you need help forming or maintaining a business entity, we can help.  You can contact us at 1-866-644-8011 or fill out our contact form.

****The opinion above is not intended to be legal advice and does not create any attorney-client relationship between its author and the readers.  Please consult an attorney for information or advice specific to your legal issue. ****

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Torrance, CA 90501


Posted in: Business Litigation, Civil Litigation, Law, Uncategorized