Articles

Back to Articles

December 08, 2008

Corporations and LLCs

A business format chosen by many entrepreneurs is the Corporation. This is a state chartered entity that is treated as a person under the law. The advantage of the corporation is limited liability for the owners, known as shareholders, to the extent of the investment only.

By contrast, a Limited Liability Company, aka "LLC," offers both limited liability for the owners and simplified business procedures. Unlike corporations, LLCs can be managed by the owners themselves, whereas corporations require a Board of Directors. Furthermore, corporations pay income taxes, unless a special "S Status" is allowed by the IRS, whereas LLCs pay no income tax unless the entity elects corporate tax treatment. Therefore the LLC is more favorable than the corporation if income tax avoidance is a high priority for the organizing members.

New York State's Business Corporation Law has been in place since the 1900's and has been well tested through legal decisions interpreting its provisions, whereas the LLC law is in its infancy, relatively speaking. If certainty of legal authority is desired, then the corporation may be a better business format than an LLC. Thus it would seem that the corporation it the more traditional, if not more conservative, form of business than the LLC. In addition, the corporation may be the better format should additional investors be needed, as the issuance of shares of stock to represent financial ownership is a time honored method of securing capital investment, whereas LLCs issue only membership certificates which are not readily negotiable.

To protect your investment, to make sound investments of time and money, and to get your business started in the right direction, you should always consult with a lawyer who practices business law prior to forming a new business.