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The Difference Between an LLC and a Corporation

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Starting a new business in the Baltimore area, as opposed to purchasing an already existing business, can be an exciting moment in your life.  It can also be a chaotic moment filled with confusion, paperwork, and legal terms you have never heard before.

Since all businesses are required to register as a specific business type it is important that you understand which type of business you are setting up before raking in the dough.

Today we are going to discuss the key differences between setting up a limited liability company (aka an LLC) and a corporation as well as whether either type requires the expertise of your Baltimore business lawyer.

Business Types

Businesses typically fall into one of three main categories: sole proprietor, limited liability company (LLC), and corporation.  For our purposes today we will not discuss sole proprietors.

Every business that exists falls into two types of businesses when it comes to taxation procedures:

  • “Pass-through Businesses”. Profits and losses of the business “pass-through” to the owners or shareholders of the business.  This means that the income generated is considered part of the owner or shareholder’s personal income and is claimed on their personal tax return.
  • Separate Business Entities. Profits and losses of the business are taxable to the business itself rather than the owner or shareholder.  This means that come tax time, the income generated does not need to be claimed on the owner or shareholder’s personal tax return, rather, personal and business taxes are calculated separately.

That being said, we can now more clearly define what a limited liability company and corporation are in regards to their tax liabilities:

 

Limited Liability Company (LLC)

An LLC is a business structure that is considered a “pass-through business,” meaning all profits and losses are claimed annually on the owners or shareholder’s personal tax return.

In addition, an LLC holds limited liability.  This means that should an LLC be sued or go under financially, the company itself is responsible.  The owners or shareholders cannot be held personally responsible for any lawsuit settlements or debts of the company, other than for the value of their investment within the company.

 

Corporation

A corporation is a business or group of people considered to be a separate business entity, meaning all profits and losses are claimed annually on a separate tax return than the owner or shareholder’s personal return.

In addition, a corporation is seen as a group that acts as a single entity and is recognized by law as such.  Much like an LLC, corporations have limited liability when it comes to lawsuits against the business and debts.

 

What Are the Differences between an LLC and a Corporation?

Though both LLCs and corporations maintain limited liability from the debts of the company and against lawsuits against the business, this is where there similarities stop.  Let’s take a look at the most important differences between the two business types so you can better understand which type your Baltimore business is going to fall under.

 

How re LLCs and Corporations Formed?

Setting Up and LLC

An LLC is formed by one or more people as owners of the business.  The owners of an LLC are called “Members.”  In order to properly set up an LLC, the Members must do two things:

  • File Articles of Organization. This legal paperwork acts to establish the existence of your LLC in the state in which you wish to conduct business.  It simply outlines specific information about your business and is filed with the Secretary of State’s office.  The information outlined includes: member names and addresses, the business address, the general nature of the business, the name and address of the registered agent responsible for accepting legal documents, and the names of any additional managers or members involved (such as Vice President, Secretary, or Treasurer).
  • Draft an Operating Agreement. This document sets forth things such as how the LLC was formed, a list of the acting members and their invested interest in the business, how the LLC will be managed, and what happens if the LLC needs to be dissolved.

 

Setting Up a Corporation

On the other hand, a corporation is formed as a separate legal entity in the state in which the business is located.  This is done by filing corporate organization forms, designating shareholders with a specific number of shares each, and electing a Board of Directors to oversee business operations such as:

  • Caring for the financial and legal requirements of the business
  • Setting the mission and vision of the company
  • Drafting policies for corporate officers and employees

 

Who Controls the Company?

It has been suggested that if you want complete control over your business that you set up an LLC.  As an LLC, you have a say in everything that happens, unless you partnered up ‒ then you and your partner(s) must discuss business matters and make decisions accordingly.

As stated earlier, a corporation has the Board of Directors to help you make all major decisions regarding the business.  In this case you may not always get your way.  One important aspect that must legally occur every year with a corporation is the annual meeting of shareholders.  The Board of Directors is responsible for this yearly meeting and the annual report, among other legally required things, must be discussed as a whole during it.

 

Where Does the Money Go?

If you want the good, you must accept the bad.  The same is true of profits and losses when it comes to an LLC.  Though you may get certain tax write-offs if your business fails to make a profit during the tax year (please consult with your accountant and tax adviser regarding this), the negative cash flow can affect your personal life more significantly than if your business was set up as a corporation.

If you set up a corporation, you do not have to claim all losses the businesses experiences, however, you do not get to keep all of the profits either.  You must distribute a specific amount of dividends to your shareholders.

 

Do You Need a Business Lawyer?

Now that you know the key differences between an LLC and a corporation, and you have decided which business type your Baltimore company is going to be, it is important to decide whether you need a Baltimore new business attorney.  Here are some things to consider:

  • Legal forms and exhaustive paperwork can be confusing.
  • Incorrectly filled out paperwork can derail your business dreams.
  • Money spent trying to set up an LLC or incorporate your business often exceed that of hiring a business lawyer.
  • Time spent trying to set up your business and learn the legalities takes away from other more exciting business aspects.
  • Other business matters can be handled such as trademarks, building lease agreements, lawsuits, and employee requirements by using a new business attorney.

In the end, setting up a Baltimore business, whether an LLC or corporation, does not have to be as confusing as it may initially sound.  However, there are many formalities required and utilizing the experience of a new business attorney, such as Dilip Pailth, Esq., may save you a lot of time, money, and hassle in the long run.

If you are looking to create a business in the Baltimore area, consider contacting Dilip Paliath, Esq. for all of your new business needs.  This way, he can handle the legal work and you can handle the fun stuff, like decorating your business space and inviting customers to check you out!

 

Dilip Paliath, Esq.

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