PA LLC vs Corporation
When comparing an LLC vs Corporation, there are several key features to consider.
From an organizational stand point, an LLC’s owners are knows as “members”, and an LLC may (only if they choose to) elect managers to take care of the day to day operations on behalf of the members.
In this scenario, the LLC would be a “manager managed” LLC. Since LLCs are not required to elect managers and there are many single-member (only one owner) LLCs, most LLCs are “member managed” LLCs.
A Corporation’s owners are called “shareholders”. Shareholders must elect Officers and a Board of Directors.
The Board of Directors is responsible for management decisions and the Officers carry out those decisions.
Specific regarding responsibilities and roles of Officers and the Board of Directors are spelled out in the Corporation’s Bylaws. Bylaws are a set of written rules that the Corporation is governed by.
Typically, Bylaws will spell out various procedures effecting the manner in which the Corporation is run, and the rights and/or powers of its Shareholders, Directors (“The Board”), Officers, and Employees.
Bylaws can be adopted, amended (changed), or removed by the Board of Directors or by a vote of the Shareholders.
Pennsylvania LLC profits are not subject to double taxation like corporations are. LLCs are what is known as “pass through entities”, where the profits/losses flow through to the individual owners personal tax returns.
An LLC does not need to file a separate federal tax return. Corporations however, pay taxes on the net profit, and then from there they distribute the profit to the Shareholders. The Shareholders then have to pay taxes again on the money they receive.
A Corporation is required to hold annual meetings and to record minutes (written notes about things that take place either in the business, or during meetings).
A Corporation is more time-consuming, paperwork intensive, and expensive, not only to set up, but also to run and manage. LLCs require less paperwork to start and maintain than corporations do.
A Corporation may serve better if you are planning on taking your company public in the future via an IPO, or initial public offering.
For the majority of businesses, LLCs are the route most people go. The chart below outlines the features of an LLC versus those of a Corporation.
Table of Features for LLC vs Corporation
|FEATURE||LIMITED LIABILITY COMPANY
|Number of owners||Unlimited. An LLC may have a single owner, called a member. A multi-member LLC has no limit to the number of owners.||Unlimited number of shareholders allowed.|
|Liability of owners’ personal assets||No personal liability as long as a court does not rule to “pierce the corporate veil” as a result of a lawsuit.||No personal liability as long as a court does not rule to “pierce the corporate veil” as a result of a lawsuit.|
|Tax treatment||LLC is not taxed at the federal level by default. Profits are passed-through to the individual members. LLC members may elect to be taxed as a corporation if desired.||Double taxation occurs. The corporation is taxed on its earnings, and shareholders also must pay taxes on their dividends.|
|Chief documents necessary to set up
||LLC Formation Documents||Articles of Incorporation, Corporate Bylaws, Stock Certificates, Organizational Board Resolutions, Stock Ledger|
|Management structure||Management structure of an LLC is set forth in its Operating Agreement. A member (owner) may be designated, or a manager who is not a member may be named to manage the LLC.||Corporations are managed by a Board of Directors, typically headed by a Chairman. Directors may be elected or appointed to their positions. Day-to-day responsibilities are delegated to corporate officers.|
|Annual meetings||No annual meetings are required. Meeting minutes do not need to be taken or filed.||Annual shareholder meetings are required and minutes must be filed.|
For many of the reasons stated above, LLCs are the most popular and flexible form of business structure (Pennsylvania LLCs comprise over 71% of all businesses formed each year in PA).
Pennsylvania LLC business owners prefer the flexibility of management, the less complicated document filings and tax requirements when compared to a corporation.
Yet, LLC members still enjoy the same limited liability protections offered by a corporation.
Choosing the right organizational structure for a new business is an important decision.
If an entrepreneur’s situation is unique, they ought to consult with a corporate lawyer to better inform that decision.