Webinar report: The Corporation vs The LLC
TABS Webinar Report
CT Corporation held a webinar entitled The Corporation vs. The LLC on April 7, 2020.
Corporations and LLC provide limited liability. In a Corporation control is vested in the board of directors, not shareholders. In a LLC however control is vested in members by default and managers by choice.
Transferability of interest (the right to sell or transfer interest to a third party)
Corporations have free transferability. Thus, a shareholder can sell all rights. LLC on the other hand, has restricted transferability. A member can only sell financial rights.
Taxation under subchapter C: taxpayer is a separate taxable entity. Pays tax on profits, double taxation if profits are distributed to owners. This applies to all corporations by default and LLCs by election.
Taxation under subchapter S: intended to provide some relief to small businesses. It’s pass-through taxation so there is no double taxation. Applies to corporations that meet IRC restrictions and elect sub S and LLCs that meet IRC restrictions and elect sub S. There are some constrictions; all owners must consent, must be individuals, certain trusts, estates and be US citizens or resident aliens.
Taxation under subchapter K: for partnerships, is a pass-through taxation. The entity does not pay income taxes but the members pay taxes. Income flows through to owners who pay taxes on their distributive share of entity’s taxable income. For a multimember LLC this is the default rule. Corporations may not be taxed under sub K.
Corporations are preferred by businesses planning to go public because of familiarity, offer of stock options and bonuses, status and case law more settled and easier path to diversity jurisdiction in federal court.
There are fewer mandatory provisions & management formalities. With a corporation you have more certainty but the LLC gives more flexibility. In a LLC you have some management alternatives. You also have more flexibility in splitting financial interests. The governing provisions can remain private and creditors are generally limited to charging order.
Charging order is a court order requiring LLC to pay a member’s distributions to that member’s creditor (lien on economic interest; no membership of management rights).
Most steps are the same in the formation process of both LLC and corporation. However, corporations must have an organizational meeting and LLC are not required to.
Corporation: board proposes, majority of shareholders have to approve. All shareholders consent.
LLC: time and event specified in operating agreement, vote of members
Besides voluntary dissolution it can also be involuntary. This happens when there are administrative issues (failure to file annual report/ pay franchise tax/reinstatement) or because of judicial reasons (statutes may provide shareholders and members with right to seek judicial dissolution/ court may order relief other than dissolution)