Practical Differences between LLCs and Corporations

When considering business entities, it can be easy to lose the forest for the trees. Half the battle is simply understanding the different language used for LLCs and corporations.

When it comes to the language of business entities, the first issue is to determining who owns the entity. In a corporation, the owners are known as shareholders. This is because they ownership of the corporate is represented by paper shares, and a person buys a certain number to represent their interest. An LLC, however, works a bit differently. There are no shares. Instead a person buys a percentage interest. Instead of being called a shareholder, the person is called a "member." Members own an LLC and shareholders own a corporation.

Creating the business entity is another area where terminology is often abused. To create a corporation, one "incorporates" by filing articles of incorporation with the relevant Secretary of State. To create an LLC, one "organizes" it by filing articles of organization with the secretary. It sounds like a simple distinction, but it is important because filing the wrong paperwork can result in the voiding of the business entity, a total disaster.

So, who governs the business entity? In a corporation, the Board of Directors is the governing entity. The number of directors is set out in the bylaws of the corporation and they are elected by the shareholders. They usually serve for a year. An LLC, of course, is completely different. The LLC is governed by the members. If there is more than a couple members, they usually elect a "manager" who is often a member, but doesn't have to be. This person usually serves for a year as well.

The formalities of the business entity is one area where LLCs and corporations are often distinguished. A corporation is often cracked upon because there are formalities required to keep it functioning. The formalities include proper notice of meetings, holding meetings and formalizing the minutes of same in the corporate book. LLCs do not require such formal function, but that doesn't mean you shouldn't do it anyway. If a dispute every arises regarding the running of the LLC [and it will], you want a paper trail regarding how the entity has been run. Without such evidence, any dispute boils down to a liars contest in court, to wit, a flip of the coin. Hold meetings and document them if you have an LLC!