Advantages of the Limited Liability Company over the Corporation

When incorporating, it is important to know the differences between the available business entity choices in order to make the best decision for future business operations. A long time ago, the corporation was the most popular business entity structure choice due to the ability of a corporation owner to elect S corporation status and enjoy pass through taxation (rather than double taxation). Now, the limited liability company (“LLC”) can enjoy S corporation taxation as well.

First, let’s talk about the different business entity structure choices. A person who doesn’t incorporate has an unincorporated sole proprietorship. Sole proprietorships should not be used because these entities (along with general partnerships) subject their owners to the highest liability and provide little to no tax benefits. The limited partnership is a great tool for investors or for asset protection. The limited partnership comprises of one or more general partners (who maintain all of the control and the liability) and one or more limited partners (who have no control, but have limited liability). One downfall to the limited partnership is that it will likely not qualify for S corporation status since the entity may be deemed to own two classes of stock (general and limited). Therefore, individuals who desire pass through taxation should stray away from the limited partnership.

Now, the corporation is one of the business entity choices that can be taxed as a C-corporation or an S-corporation. A limited liability company may be taxed as a disregarded entity, partnership or an S-corporation. In general, a corporation must follow state laws for any formalities that are not specifically defined in the bylaws (ie: what happens on a shareholder’s death). Further, each class of stock must have the same characteristics. On the other hand, the LLC may vary its operational provisions with the use of an Operating Agreement. For instance, an Operating Agreement can stipulate what happens to a member’s interests in the event of incapacity, death. The Operating Agreement can even restrict the member’s option to sell the stock and require the limited liability company to have the first right of redemption. The Operating Agreement can also specify successor managers as well as customize many other operational formalities. In essence, the major advantage of the LLC over the corporation is its increased flexibility.

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