Corporation or LLC- Which One Should Your Use for Your Alton, IL Business?

When looking at making your business either a corporation or an LLC there are many similarities and differences to consider. Both are able to limit the liability of the investors. This includes the owners and shareholders, from the debts of the business. This also defends the investors from lawsuits being made against the business. The concept of limited liability is usually expressed by stating that liability is limited to the extent of the person’s direct investment.

Both types of businesses must work to keep their operations separate from the activity of the owners in order to maintain their liability protection. This is known as the “corporate veil” which means that there is a separation between the liability of the business and the liability of the owners. If a court found that the operations were not separate, the owner or shareholders would then become liable for the debts or actions of the business.

If you are confused about how an LLC and a corporation are different and which you should claim for your local Alton, IL business, then check out our list of differences below.

How the Business is Formed

Businesses must register as a specific type with the state of Illinois or the state in which they do their business. All states recognize businesses formed as LLCs (limited liability companies), corporations, partnerships, or a variety of these forms.

LLC Formation: An LLC is formed by one or more people, as the owners. The owners also called “members” file Articles of Organization with their state. They then put together a contract that is called the Operating Agreement. This contract manages the day-to-day activities and helps decide each member’s percentage share of ownership.

Corporation Formation: Corporations are formed by filing corporate organization documents in the state the corporation is located. This includes the Articles of Incorporation and other similar documents. The corporation should also create a Board of Directors who oversee the corporate business and agree on the creation of the bylaws.

Corporation Vs LLC Ownership

LLC Ownership: LLC owners are also known as members. They have an equity (ownership) interest in the assets of the business. This is because they have made an investment in order to join the business.

Corporate Ownership: Corporate owners are also known as shareholders or stockholders. They have shares of stock in the business, which allows them to own a part of the business.

LLC Vs Corporation Profits & Losses

When it comes to profits & losses, both corporations and LLCs handle them differently.

LLCs Way of Handling: LLCs, similar to partnerships and sole proprietorships are pass-through businesses.  Pass-through businesses are those in which the losses and profits pass through to the shareholders or owners. The shareholders pay their share of the company’s profits on their personal tax returns.

Corporate Way of Handling: Corporations are separate from the owners of the business. The corporation pays income taxes on its losses & profits, which is not directly done by the owners. Some of the corporation’s earnings may be paid to the owners in dividends. However, this is not a direct method, and some of the earnings can be kept by the corporation itself.

If you have any other questions about the differences between corporations and LLCs, make sure to give our team at Diaz Law a call today!