Knowing the Differences between a Limited Liability Company LLC vs Corporation Can Mean Less Liability When You Comply with the Rules.
When forming a new business, you might wonder what is the difference between a limited liability company, LLC vs Corporation. What does LLC stand for in business terms? In Colorado, and in many other states, a limited liability company (LLC) is a business created under Colorado statutes.
Potential benefits – Why Would you Want to Start an LLC versus another business entity?
Understanding the difference between the two business entities, and qualifications for each depends on the business operations and the number of employees involved. If allowed by statute, the LLC is the preferred business entity because it is readily available for preferred tax benefits such as flow-through taxation.
The simplicity of creating the LLC seems to be attractive to new business owners. Even though this is true, there are several legal landmines that you want to be aware of. In addition to the simplicity, the business structure tends to protest small company owners for more when it comes to protecting personal assets and not being subject to creditors.
When looking at the meaning and differences between and LLC and corporations, the IRS can treat your limited liability company either as a corporation or a partnership for tax purposes. The outcome depends on the number of members assigned and the elections made by the LLC.
Why is this important? Because without the proper application of the rules, the outcome of any claims or lawsuit for an improperly formed company can be dangerous. When creditors or other plaintiffs file a lawsuit, they actually sift through the details in hope of finding a legal error in the formation of the company.
LLCs and S corps are very similar when reviewing the following:
- Limited liability protection. With both forming a corporation and LLC, owners are typically not personally responsible for business debts and company liabilities.
- Separate entities. Both are separate legal entities created by a state law.
- Pass-through taxation. Both the S Corp and LLC have pass-through taxation. S corps must file a business tax return, but the LLC only files a business tax return if the LLC has more than one owner. With pass-through taxation, no income taxes are paid at the business level. Business profit or loss is passed-through to your personal tax returns. Any necessary tax is reported and paid at the individual level.
- Ongoing state requirements. Both are subject to state-mandated formalities, such as filing annual reports and paying the necessary state filing fees
LLC Stands for What in Business Terms?
In business terms, creating an LLC means having personal liability protections, and more flexibility to run the day-to-day business operations. A limited liability company with at least two members is recognized as a partnership for IRS tax purposes. To avoid this, you would have to file Form 8832 and affirmatively elect for the IRS to treat your company as a corporation. See also Small Business Size Standards, SBA Size Protests & Appeals Bid Protest Requirements.
Certain business entities cannot be Colorado limited liability companies LLCs: This includes banks and insurance companies. Before filing LLC articles of organization in Colorado, be sure to speak to a business attorney about the various meaning of LLC terms. You want to make sure that you are in compliance with the state business laws.
If your LLC has more than one member, it will automatically default to being treated as a partnership. The difference between a Colorado limited liability company LLC and a corporation rests upon your decision to file the Form 8832 asking the IRS to treat your company as one versus the other.
- There are many other differences between the meaning of Limited Liability vs corporation besides the various tax benefits
Creating an LLC vs Corporation — LLC Viewed as Legal Business Entity?
When forming an LLC, you must understand that you have certain compliance obligations when forming an LLC vs Corporation.
- Understand the difference between a sole proprietor and partnership; S-Corporation vs. C-corporation.
- For tax purposes and personal liability that your LLC can be viewed as a separate business entity.
- Drafting an operating agreement to protect your interests and to resolve legal disputes when they occur.
What is a Corporation?
A business corporation, like an LLC, is considered a legal entity that is separate and distinct from the actual owners. Corporations enjoy most of the legal rights and responsibilities that you as an individual possess. A corporation can:
- enter into contracts
- get business loans and borrow money from the bank, sue and be sued etc.
The Corporation is structured differently than an LLC, it requires more corporate documents through the secretary of states and is really in place for the larger companies.
S and Corps go to how the IRS sees your corporation and LLC for tax purposes. Where, sole proprietors, partnerships etc go the legal issue of how to others look at your company – courts, customers, opponents to a lawsuit etc.
For help creating an LLC vs corporation in Colorado, forming corporation or more information about what LLC stands for in law, or S Corp vs LLC call our Denver business lawyers at 1-866-601-5518.