And while Limited Liability Companies are a newer entity type than C-Corporations, they offer unique differences that the C-Corporation cannot provide (and vice versa), and in recent years have often become the entity type of choice for newer and smaller businesses.

One of the primary differences between the two is from the taxing standpoint. C-Corporations are subject to corporate income taxes that are completely separate from their owner(s). Because of this, C-corporations have a greater and more complex tax reporting responsibility than most companies.

This differs from an LLC, which passes profits through to the owner(s), who are then subject to only personal income tax (i.e. The LLC does not pay federal income taxes to the IRS, unlike a C-corporation). This helps avoid double taxation, which C-corporations may have to face if they pay dividends to their shareholders (the corporate income is taxed, and then, if the net income that is left after taxes is distributed to the shareholders, it is then taxed at the personal level at the prevailing dividend tax rate.

While this may seem like an advantage for an LLC, that is not always the case. Because of the Pass through” of profits, LLC owners must pay self employment taxes on profits in addition to their personal income taxes.

A second major difference between LLCs and C-Corporations is that of the ownership structure.

C-Corporations have sort of a hierarchal structure. Power is divided between stockholders, who then hire/appoint directors that make the overall decisions for the corporation, who in turn hire/appoint officers to run the day to day operations of the company. Stockholders with more shares are rewarded with more voting influence and profits.

While this is a standard for most C-corporations, it is not the case with an LLC.

LLCs are structured essentially like a partnership (or a sole proprietorship in the case of a single member/married couple LLC), but with the limited liability protection, similar to a corporation. Members (the generic term used for the owners of an LLC) run the company and make all decisions. The division of ownership, as well as the distribution of the profits (which may be the same or different from the distribution of ownership) as well as most other matters are decided by private agreement amongst the owners.

With an LLC, the owners make the rules in regards to profit distribution and power. A 5% shareholder could reap larger profits if the other owners deem it fair. Thus, and this is in general terms, LLCs are typically a better choice for smaller companies where only a few principals and workers are involved.

Also, an LLC doesn’t need multiple owners to exist; only one member is required in order to have an LLC by all states.

LLCs are also not required to hold corporate and shareholder meetings, which are a requirement for C and S Corporations.

They both have their distinct uses. In general terms, a C-Corporation may be a better choice for a larger entity with more shareholders, and it is also the best choice if there are plans to of equity ownership to a larger number of owners, whether in terms of private placement or taking the company public and having it listed on a stock exchange.

However, this also means a tiny C-corporation stockholder who contributes beyond his or her percentage of ownership will not be rewarded anything beyond what he or she would have normally received (unless the shareholder is compensated with salary or bonuses).

While quite similar in many respects, LLC’s and S-Corporations both have advantages over one another.

For example, while LLCs and S-Corporations share the same “separate entity” status enjoyed by corporations (meaning the company is a separate entity from its owners), the profits and voting power are not necessarily allotted the same way.

An S-Corporation divides profits between its shareholders evenly. Someone with 30% of the stock would receive 30% of the profits while another with 10% of the stock would receive 10% of the profits, and so on.

This is not the case with the LLC. In an LLC, the members (akin to stockholders, although LLC’s usually issue “member units” as opposed to common stock) decide how profits should be divided. There may be someone with 10% of the “stock”, but they put in 30% of the work. This stockholder can receive more than what they have invested if the other members agree that they deserve it.

The same goes with voting power. S-Corporations follow a more traditional structure by which voting power is determined by stock ownership. An LLC can give more or less voting power to stockholders regardless of how much stock they may own.

Also, there are several other abilities an LLC has that do not apply to S-Corporations.

LLCs:

* No ownership restrictions – virtually anyone (individuals, Corporations, other LLC’s, and even foreign entities may be owners of an LLC).
* Can operate with a single member.
* Are not required to hold annual meetings.

An S-Corporation has separate ownership provisions. The S-Corporation is limited to 75 shareholders all of which are required to be US citizens. They are also required to hold shareholder and corporate meetings, which can affect record-keeping needs and continuity within a company.

LLCs sound pretty good, right?

Well (and you knew this was coming), there are some down-sides too.

For starters, S-Corporations get better deductions in regards to benefits (health insurance, etc.)

The status of the pass through income is a little different as well for the personal service principals (the principals that are employees.) It is considered “passive income” and not “earned income (like it is with an LLC.) Thus, Social Security and Medicare taxes (at this writing) are not levied.

In addition, LLC’s may have a limited shelf-life. Some states have a cap on how long they can stay in business (30 years, etc.)

In closing, you could say that S-Corporations allow for more shareholder uniformity and tax savings, while an LLC allows more free negotiations and possibilities for ownership and accountability. You can almost think of an LLC as a marriage between a classic small business (partnership / sole proprietorship) and a corporation.

An operating agreement is a contract among the LLCs members stipulating its membership, management, operation, and the distribution of the company’s income. It documents the roles, responsibilities, rights, and relationships of the members, as well as their respective ownership percentages, shares of profits and losses, and what will happen to the LLC if someone leaves or if a new member wants to come on board. Not only does this increase your organization’s efficiency and effectiveness, it also helps prevent disagreements and misunderstandings about decision-making and financial dealings.

The Incfile.com LLC Kit has a customizable operating agreement that can be customized to meet the particular needs of your LLC.

Having an operating agreement also gives your LLC credibility as a separate entity, especially when it comes to the legal system. It helps safeguard your limited liability status, so it is a smart idea even if you are the sole owner of your company. If you are a single member LLC but do not have a formal operating agreement, the court may not respect your limited personal liability and may view your operation as a sole proprietorship instead, opening you up to significantly increased financial and operational risk.

Documenting your LLC’s procedures in an operating agreement also allows the members to set the rules, instead of being forced to follow your state’s default rules – which might or might not be a good fit for your particular business. Each state has its own laws governing basic operating procedures for LLCs. In some areas, these state default rules will be the controlling factor in how your business runs unless your operating agreement specifies different rules.

Some states, for instance, have a default rule that requires LLC members to divide profits and losses equally, regardless of the level of each member’s investment in the business. If all members did not invest equal amounts in the LLC, it’s unlikely that all members will want to allocate the profits equally. To avoid this, your operating agreement should spell out how you and your fellow members (sometimes called co-owners) want to split profits and losses.

Another area that your operating agreement needs to cover in detail is how ownership shares are distributed. The members/owners of an LLC usually contribute cash, property, or services to the business to help get it started. In consideration of this, each LLC member gets a percentage of ownership in the LLC—usually in proportion to their contributions, but LLC members are free to divide up ownership any way they want to.

As well as getting a percentage-based ownership interest in exchange for their contribution of capital, LLC co-owners each also receive shares of the LLC’s profits and losses, called distributive shares. Each owner’s distributive share usually corresponds to his or her percentage of ownership in the LLC.

The operating agreement should also specify how much of the LLC’s allocated profits will be actually distributed to the members each year. It’s important to remember that an LLC member has to pay income taxes on the full amount of the profits that are allocated to him by the distributive shares specified in the operating agreement, whether or not those profits were actually paid to the member.

Since LLCs usually have relatively few members, most management decisions are made informally. Sometimes, however, a decision is so significant or contentious that a formal vote is necessary. While some LLCs allot one vote per member regardless of shares – called per capita voting – it’s more common for each member to control votes proportionate to his or her shares in the business. The operating agreement should also specify whether a simple majority will decide voted questions, or whether unanimous consent is required.

The paradox is that the more well-thought-out your operating agreement is—the more contingencies and possibilities it covers – the more complex it is, not to mention longer. This article has mentioned only the highlights of what an LLC needs to cover; specific requirements will depend on the laws of your state and exactly how you want your business to operate. Again, the LLC Kit will answer your more detailed questions.

There are advantages to starting an LLC. For one thing members may be individuals, other partnerships; they may be non-resident aliens or a trust. This allows for more flexibility for the company formation. Distributions need not be equal. If one member invests more or contributes more to the business, that member may reap more of the profits. The agreements of disbursement are stipulated in the LLC operating agreement. Additionally, there need be no organized meetings and minutes, often an unnecessary formality for a small business. Taxes “pass-through” the company, and the individual members are taxed at an individual levels and not the company level according to their profits or losses. While LLCs file tax returns, the company does not pay federal income tax. Consequently, administrative paperwork and accounting are simpler for an LLC. Perhaps the most important advantage to LLCs is that it provides liability protection to the business owners, since owners are considered separate entities from the LLC. Personal assets are not connected to the company if the LLC is in litigation.

You might wonder, “Can anything be simple”? Well, yes, with the proper help some things, like forming an LLC, can be made quite simple. Knowing where to look may be the hardest task. You can hire a lawyer to guide you through the process of an LLC formation, but expect this to be costly. Using an online incorporation company is another option. Online incorporation companies will guide you through the process. Look, to incfile.com for help when filing for a LLC. With their help, the process can be made quite simple. An online incorporation company such as incfile.com will process the paperwork with the state of formation as well as file any necessary IRS forms.

Small business owners are especially at risk of stumbling into this particular pitfall. Since they are often overwhelmed with the multiple facets of their business’ day-to-day operating needs, they may not know how to avoid noncompliance and the resulting crippling or fatal business consequences. IncFile.com can help.

Corporations and LLCs have both internal and external ongoing requirements. The internal requirements must be met by the directors of the corporation or the members of the LLC, and then documented in company records. External requirements are those imposed by the state in which the LLC or corporation was formed; these often include, at a minimum, an annual (every year) or biennial (every two years) filing with the state, as well as some kind of fee.

Internal Requirements

Internal requirements are frequently overlooked, but are vitally necessary to effective decision-making and communication within the organization. A corporation has more internal requirements than an LLC; these include holding and properly documenting director and shareholder meetings, adopting and updating bylaws, issuing stock to shareholders, and recording stock transfers. While these actions are not specifically required for an LLC, it’s still a good idea to adopt an operating agreement (and keep it up to date with amendments as needed), issue membership shares, record interest transfers, and hold annual meetings.

Owners use a consolidated corporate records book to organize and maintain important corporate documents such as articles, bylaws, meeting minutes, resolutions, stock certificates, deeds, and so on. Many business owners use a Corporate Kit or LLC Kit for organizing and maintaining these vital records. Many businesses also use a metal or rubber corporate seal—the kind that leaves the company name in raised letters on a document—to signify that the document is an authorized, official transaction of the corporation. These can be obtained as part of a corporate kit or from a stationery store.

Bylaws lay out the corporation’s basic operating principles; they should be planned for and drawn up as part of the incorporation process. It is not required to file the bylaws with any government agency, but a corporation is required to have at least an initial and annual meetings, adopt bylaws, and keep minutes of the meetings, and keep these on file with the corporate records. Bylaws are important because they set down formal rules for such things as: when and how meetings can be held; notice, quorum, and voting rules for meetings; how decisions can be reached and recorded outside of meetings; basic titles and responsibilities of corporate officers; and the requirements for providing periodic (usually at least annual) information to shareholders.

In short, bylaws are the corporation’s major decision-making and operating procedures set down on paper. This can help owners refine and improve their common practices, and can also serve as a “referee” when uncertainty or disagreements arise on what the official solution is to a given situation or need. Bylaws also give your firm credibility in the eyes of shareholders, creditors, potential investors, other businesses, and even the IRS. Owners should take care, though, to make sure their bylaws do not conflict with their state’s Business Corporation Act or its equivalent.

If the board of directors is not already appointed in the articles of incorporation—a requirement in some states—the initial board’s names and addresses will need to be listed in a separate document. These directors will serve on the board until the first annual shareholders’ meeting, when a new board will be elected.

One of the new corporation’s most important tasks is to prepare minutes for the first board of directors meeting. This first meeting is where several key company actions should be approved, such as electing officers, adopting bylaws, selecting the main office or headquarters location, choosing a bank for corporate accounts, the accounting period or fiscal year, initial tax elections, and issuance of initial shares of corporate stock. Normally the groundwork and supporting research is done before the actual meeting, although the board can change or amend the minutes as prepared if they vote to do so. Any of the initial directors can prepare the minutes, but the entire board must sign them at the meeting, incorporating any amendments or changes as needed.

Thereafter, at a minimum, the corporation must hold a shareholders’ meeting and a board of directors meeting at least annually; accurate, complete minutes for both are essential, because these documents will be used as reference materials for future decisions. Remember: “If it’s not written down, it didn’t happen.”

A limited liability company, on the other hand, comes officially into being when its articles of organization are filed with the state’s LLC office. The articles contain basic organizational information about the LLC, such as its name; whether it’s managed by its members or by selected members called managers; the name and address of its members; and where its office is.

Next to its articles of organization, the most important document for an LLC is its operating agreement. This isn’t required by the state (except for New York)—but it’s a key internal document that officially records how the LLC will run. It is very much the same as a partnership agreement; except for an LLC it is called an operating agreement. It lists the members, how much each member has invested, how profits will be divided, and how much weight each member has when matters come to a vote. It may also specify requirements for meetings (notice, quorum, voting rules, etc.) and the like, but it doesn’t have to. Normally, however, the operating agreement does include state-mandated requirements.

External Requirements

External requirements usually consist of a periodic report to the state and some kind of fee. Most states require corporations and LLCs to file an annual or biennial statement or report, along with an associated filing fee of some kind. LLCs may also be liable for payroll tax, property taxes, sales and use taxes or “seller’s permits,” or business license renewals. Other state or local filings, such as business licensing or state or municipal tax registrations, may also be required. Owners will also still file their individual state and federal income tax returns.

Some states also impose a franchise tax—basically a fee paid by the company for the state’s permission to operate there. Different states use different methods to calculate the franchise tax; it may be based on revenue, or on some measure such as a corporation’s total number of authorized shares and their value.

Each state has its own deadlines for annual statements and franchise taxes. Some states determine these based on the formation anniversary of the corporation or LLC. Other states set one deadline for annual statements for all corporations and another for all LLCs. Business owners need to know how and where to research these requirements so that they can plan for them before incorporating, and then keep up with changing requirements as their business continues to operate and progress.

Copyright Notice: Guests of IncFile.com’s website may not copy, republish, or redistribute information or material from its website in any form, printed or electronic, without the express written consent of IncFile.com. Requests for use of copyrighted material from the IncFile.com website should be directed to support@incfile.com.