LIMITED LIABILITY COMPANIES AND BUSINESS CORPORATIONS are just two of the wide variety of business structures to choose from when deciding how to organize and operate business ventures. Other alternatives include the sole proprietorship, general partnership, limited partnership, and limited liability partnership. For a number of reasons, corporations and LLCs are often regarded as “better” choices. This article compares some of the key features of LLCs and corporations.
Corporations have been available in all states for many decades. LLCs have been available in New Jersey since 1994. By comparison, LLCs are relative newcomers but are quickly becoming the “entity of choice.”
A corporation or LLC cannot exist under New Jersey law until a document creating the entity is filed with the appropriate state office. For a corporation, the creation document is a “Certificate of Incorporation” and for an LLC, the document is a “Certificate of Formation.”
After creation, both corporations and LLCs must register with the state for tax and labor purposes. In addition, both corporations and LLCs must file annual reports and pay the related filing fee to maintain their existence. Corporations have additional post-creation formalities, including holding an organizational meeting of the directors to issue stock, adopt bylaws, elect officers and conduct other organizational business. Corporations must also hold annual shareholder meetings. LLCs are not required to formally organize after creation or have directors, officers, bylaws or annual member meetings.
Both corporations and LLCs afford a liability shield. That is, owners of corporations (i.e. shareholders) and owners of LLCs (i.e. members) are not personally liable for the entity’s debts and obligations incurred in the normal course of business.
As a general rule, LLCs are required to report income, but do not pay federal income tax. Income and losses flow through to members who then determine their individual tax obligations. Corporations are required to pay taxes on net income and, if profits are distributed to shareholders via dividends, the dividends are taxable income to the shareholders. Subject to certain ownership and management rules, small corporations may qualify for flow through tax treatment by electing “S” corporation status. An LLC can elect to be taxed as a corporation.
Transfer of Ownership
Corporate stock is freely transferable. By comparison, members of LLCs may freely transfer their right to receive profits from the LLC, but their right to participate in management is not, as a general rule, transferable.
There are numerous important differences between a corporations and an LLC. The entrepreneur should seek competent legal and tax advice before deciding how to structure his or her business. Please contact the author if you wish to discuss this article or his practice areas.
This article is provided solely for the general interest of the reader. The article and its contents are neither intended as, nor should be construed as, legal advice or opinion. Legal advice and opinion are provided by the firm only upon engagement with respect to specific factual situations.
Barry F. Gartenberg, L.L.C.
Attorney at Law
505 Morris Avenue, 1st Floor
Springfield, New Jersey 07081