If you’re considering starting a Limited Liability Company (LLC), you may be wondering about all the options you have at your fingertips— particularly if you think others would be interested in contributing to your business through smaller investments like stock!
But LLCs themselves don’t issue stock; corporations do!
Let’s explore the further nuances of LLCs versus corporations so you can be crystal clear on what type of business you want to start and how utilizing the best business structure can help you grow.
How LLCs Work
An LLC— or a Limited Liability Company— is a type of business entity that contains owners (called members) who have limited liability for their company’s debts and obligations. That means if something goes wrong with the business, whether through being in debt or legality, that party can’t sue or collect from the LLC members’ personal assets.
Advantages of LLCs
- Easy to Establish: With just a few hours, you can easily register your LLC through your State Secretary of State website or through a business formation company like doola.
- Few Formalities: An LLC has the Articles of Organization (that’s automatically created when you establish your LLC), and that’s about it. You don’t have to hold annual meetings or keep minutes of its proceedings as corporations do. This doesn’t mean you should skip these steps, though; writing up a solid business plan can only help your business grow.
- Pass-Through Taxation: LLCs are taxed as pass-through entities, which means the company’s profits and losses are passed through to its members and are reported on their individual tax returns as opposed to a separate tax return. This is great for businesses that don’t want to pay both individual and corporate taxes, which corporations are required to do.
Limitations of LLCs
- Limited Growth Potential: With their simplicity also comes limitations in their growth potential. LLCs are limited in what they offer (like the ability to own stock), which could make it a bit more difficult to raise capital to fund growth and expansion. With that, though, you can file as an S corporation on your tax returns depending on the flexibility you need without necessarily changing your entity type.
- Less Established Business Structure: With LLCs’ simplicity and ease of use also comes less of an established business structure. Because it doesn’t require things like a board, stockholders, or business meetings, it might be trickier to get investors to contribute, as they might not be fully convinced of its ability to grow.
- Potential for More Taxes: LLC owners are required to pay self-employment taxes, currently at a rate of 15.3%, on salaries and profits, while corporations only have to pay these taxes on salaries (not on profits).
How Corporations Work
A corporation is a legal entity owned by shareholders and managed by a board of directors who are elected by those shareholders. The board of directors appoints officers to run the day-to-day operations of the corporation, while the shareholders are contributing stock to the company to help it grow.
Being able to issue stock is one of the big advantages of a corporation. It represents ownership in a company and helps many business owners expand their operations with the help of multiple shareholders.
Advantages of Corporations
- Easily Transfer Ownership: Shares of a corporation’s stock can be easily bought and sold on the open market, making it easy for shareholders to transfer ownership. This can provide liquidity and flexibility for investors and can provide more opportunities for outside investments for the business owner.
- More Growth Potential: Corporations have the flexibility and scalability for growing faster, offering a few simple ways for people to invest without needing to grow their members.
- Collective Support: With its multitudinous ways of getting involved, corporations have more opportunities for many people to get involved, from being a board member to being a part of its common stock to its preferred stock.
Limitations of Corporations
- Increased Complexity: Corporations can be more complex to set up and manage compared to simpler business structures like sole proprietorships or partnerships. If you’re a first-time business owner and have never run or managed a business, or are still figuring out what your business will offer, running a corporation will require a lot more paperwork, legal documentation, and ongoing compliance requirements, which can be overwhelming for some entrepreneurs just starting.
- Double Taxation: Aside from having a higher potential for fees and legal costs, corporations are also subject to double taxation. While an LLC can serve as a pass-through entity, being reported on its owner’s individual returns, a corporation has to pay taxes on the same income, both on the personal level and on the corporate level.
- Less Flexibility: Corporations have to follow strict rules when it comes to making major (or even minor) decisions, based on the bylaws created by their incorporators or board of directors.
LLCs vs Corporations: Which Is Better?
LLCs and corporations offer different fundraising opportunities, long-term objectives, and ownership structures.
Since LLCs are oftentimes used for new businesses as they’re relatively simple to start, investors might not be as willing to contribute their time or attention to a business that its owner doesn’t necessarily have as much structure requirement. (You could combat this by creating a stellar business structure and plan, showing your dedication and determination for growth!). However, where LLCs lack the potential for structure, they gain the flexibility to make your business how you’d like it— having greater flexibility in how you raise capital, as you’re not answering to a board of directors or shareholders.
If you’re looking for a simple start, then corporations might make it a bit trickier to get started with all its structure requirements. When looking for funding for your corporation, you might find that it’s easier to catch the attention of investors since it’s a more structured and rigid business structure that requires lots of upfront formation work. Plus, with the option to hold stocks, it also might be simpler to get a collective vested interest in your work to help you raise capital faster.
A key difference between LLCs and corporations is their capacity for long-term objectives, dictated by how they’re structured and managed.
LLCs are usually more flexible with management and ownership structure, making them ideal for small businesses with fewer owners. This could make long-term objectives happen faster, as it isn’t required to get everyone’s sign-off before going along with a new direction; however, an LLC owner will need the initiative and accountability of achieving those objectives, since LLCs are a less formal structure than a corporation.
With corporations, a business owner has a formal board of directors and shareholders to whom they’re tied to. This could up the ante for them to hit goals, since tens or even hundreds or thousands of people’s money could be at stake, or could make long-term objectives more difficult since they need everyone’s approval before making changes.
An ownership structure can largely dictate the way a business is run. Consider an LLC, with either a single- or dual-member structure, where two members are ultimately making all the decisions. While you’ll have a clearer understanding of the owners in an LLC, you’ll also have limitations, like if you want to have a more collective consciousness contributing to its greater mission or more stakeholders contributing, all of which a corporation could offer.
While that ownership structure helps bring big minds together, it could also hinder your work, making it a bit more difficult to make decisions needing everyone’s consensus. To get a glimpse, shareholders elect a board of directors to oversee the management of the corporation and make important decisions about the company’s direction. The board of directors then appoints officers to run the day-to-day operations of the corporation. Shareholders have the right to vote on important issues, such as the election of directors or major changes to the company’s bylaws.
Let a Team of Specialists Help You Choose
The choice between starting a limited liability company or a corporation could depend on any or all of the facets we listed above. Consider the benefits and drawbacks, connect them to your business, your values, and how you envision running your operations, and make an educated decision that fits your needs.
Bring in a team of business formation specialists like doola who can walk you through everything from forming your business structure to managing your finances!
Do all corporations have to issue stock?
Yes, every corporation must have at least one type of stock, even S corporations, but they are limited to 100 total shares and only one type of stock.
Can a partnership issue stock?
No, a partnership cannot issue stock. Only corporations, which are separate legal entities from their owners, can issue stock.
Can a small business issue stock?
Yes, a small business can issue stock if it is structured as a corporation. A corporation is a legal entity that can issue shares of stock to raise capital.