Corporation Versus LLC – Which is better for my business?
There are several fundamental differences between corporations and LLCs. Determining those differences can have a direct impact on your business.
Corporations are much older entities. Traditionally, they have been used to save money on self-employment tax and to provide corporate protection. This prevents any potential business lawsuit from affecting the owner’s personal assets.
Unfortunately, one of the disadvantages of the corporation is that the shares are vulnerable to personal lawsuits, such as divorce, bankruptcy, car accidents, etc. There was a case in California several years ago where a 17 year old was involved in a DUI. He had no resources, so the plaintiff sued his father. Due to the nature of the corporate stock, he was able to force the liquidation of the father’s multi-million dollar computer business to pay for the settlement.
This is not the case with an LLC. With an LLC, if the shares are foreclosed, the litigant has financial rights but no voting rights. They cannot force the managers of the LLC to liquidate anything within the entity. Due to this unique ownership of the LLC, this makes the LLC an excellent vehicle where there is something of intrinsic value within the entity.
LLCs are commonly used for stocks, bonds, real estate, domain names. anything of value. I even set up an LLC for a rancher in Deaf Smith County, Texas to protect his herd of cattle. He was an organic rancher and many of the ranches on the periphery hired him to feed their cattle. By setting up the LLC, rather than a corporation, if one of your animals ran out of livestock on the road and caused an accident, you protected your personal assets. On the contrary, if he had a personal lawsuit or of any kind, no one could force him to liquidate his herd.
Please note that this is only one factor to consider. Different states also have different tax implications for corporations and LLCs. For example, in California, C-corps, S-Corps, and LLCs are taxed differently.
