Corporation vs. LLC

Do you know the difference between an LLC and a corporation?

What’s an LLC?

First, LLC stands for Limited Liability Company. A Limited Liability Company is registered in your state with your Secretary of State. They are governed by what we call an operating agreement. An operating agreement is an agreement between the members and the LLC. Now, members who are technically the owners of an LLC, a member of an LLC has a percentage of ownership. They're not shares, they're not shareholders, and not even technically called owners. They're called members. If there's one person who owns the LLC, we call that a sole member LLC.

Now an LLC can be governed by a manager or a member. And that's it. It's not managed by an owner or a president or anything like that. Now, do people give themselves those titles, Owner, Founder, President–and that's fine. As far as actual registration of an LLC goes, the owners are called members. And it's just determined if there's a manager that manages the LLC, or a member who manages the LLC. And that's really all the details we get on titles.

Now, the biggest piece I like to reiterate is there are no shareholders. If you're looking to bring people into your LLC, you're technically granting them equity as a member. There's no treasury, there's no stock held back, there's really no type of grand reporting on these things. LLCs also require, in most states, an annual report but there are a few exceptions. For instance, in Missouri, you don't file anything annually, you file one time, and you have your LLC.

What’s a Corporation?

Now, a corporation, let's contrast this. A corporation is also a business entity that is registered with your Secretary of State. So that's the similarity. Now the contrast here is there's no operating agreement, it’s governed by bylaws. This is different, and here's why. In bylaws, we get into things like board of directors, voting forums, and things like that. Now can LLC’s kind of get that detailed? Sure, but most people who need that level of detail in their business are going to go for a corporation. Why? Because they typically need shares and shareholders. They need extra ways to grant equity and to grow.

Diving into shares and shareholders, corporations do not have members, they have shareholders. Now you issue shares and whatever that shareholder has represents their ownership of the corporation. You can be a single member Corporation. This is very, very common for founders and startups. You can issue yourself, let's say, for easy math, 10,000 shares, and that's all the shares the company has. You are the sole shareholder, you have 10,000 shares. Now, as you bring on more people to help to help grow your business, invest, or whatever it may be, you just issue them shares. That's how you grant them equity into your corporation.

Remember, this is different from an LLC, an LLC is just a “percentage” of membership. There's no shares. In a corporation, we have shares. So that's a key difference. Also, with a corporation, while you have those bylaws, you also have a shareholder agreement. There's more drafting involved, and things like that. However, the shareholder agreement can be an outline or a template, so you have the same set of rules for your shareholders. As you bring on new shareholders, sort of “rinse and repeat” that same type of templating language, because these are the rules for everybody. The rules for Shareholder A are the same as shareholder B.

Also, with a corporation, you have more control in creating different types of management and voting opportunities. You can create classes of shares, preferred shares, par value shares, there’s a lot of creative things you can do. This can be a big advantage. If you plan on growing a multi-level organization, you can give certain people management power, certain people voting power, and you can start to delineate a lot of the authority and expectations. In an LLC, you just can't get that detailed.

Now, let's say you have members and you have managers, and that's about it. When we get to the corporation level, we're allowed to create all these different multi-layers of protections and authority that can really help to grow and scale your business.

So Which One Do I Need?

Now, I know you're going to ask, well do I need an LLC or do I need a corporation? And of course the decision is yours to make. However, what I tell most folks is if you plan on growing and raising money, you really want shares because you know that people you're talking to are used to dealing with shareholders.

Most of your savvier investors are going to want shares. They're going to want to be issued a shareholder agreement, they're typically voting shares, and they're going to understand who the other shareholders are in the business. That level of transparency and the ability to be flexible with shares–that’s what a lot of investors are looking for. If that's your angle, and that's your end goal, a corporation typically makes sense for you. Now, if it's just you, or maybe you and a friend or business partner or your spouse owns a business, and you don't have those types of goals in mind, or you're a professional corporation, where you're not even allowed to have shareholders, an LLC typically will make sense for you.

Another example that I like to give here is that if you're selling things online, like on Etsy, an LLC is probably fine. Like I said, it's minimal reporting and in most states, it's typically lesser filing fees, and it's just overall an easier, simpler business structure. Now, can you change from one to the other, I can dig into that more in a different blog post. But in short, there are mechanisms to allow you to change and fluctuate as you grow. Those are the key differences between an LLC and a corporation. If you have questions about what's right for you, reach out to us. We're always happy to help.