What’s the Difference Between an LLC and a Corporation?

The fine print that separates a limited liability company (LLC) from a corporation can be overwhelming for new business owners or entrepreneurs. While the minutia of these details might be best suited for a legal advisor or accountant, the broad differences are fairly easy to understand, and they might be enough to help you make a judgment if you’re conflicted over these two different types of business entities.

LLC Vs. Corporation

Corporations and LLCs are similar in that they both are legal entities recognized separately from their members or shareholders, and those individuals are not personally responsible for the company’s debts or losses.

Corporations must file what’s called Articles of Incorporation with the Secretary of State, whereas LLCs file Articles of Organization. The costs and fees for each entity vary on a state-by-state basis.

Corporations have much less flexibility with regard to taxes than an LLC. Corporations have the disadvantage of double taxation—this means that the corporation’s profits are taxed, and then each shareholder’s dividends are taxed again on an individual tax return.

Conversely, an LLC can choose how it wants to be taxed, and will likely choose a tax identity that provides the most benefit to the business and its members. For example, an LLC can be taxed like a sole proprietor, partnership, or corporation.

Depending on the nature of the company and its planned business activities, how an LLC chooses to pay taxes will ultimately determine whether the LLC needs to obtain a tax ID, sometimes called an Employer Identification Number, or EIN for short.

The tax ID for an LLC and the tax ID for a corporation are the same thing: an EIN is a nine-digit number that will stay with the business forever. It helps track the business for tax purposes and allows you to open accounts and acquire credit in the name of that business; you need to apply for an EIN for both!

These are some of the broad differences between an LLC and a corporation that may help you decide which type of business formation is right for you.

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