What is the difference between a corporation and a limited liability company?
Business transaction law governs the various forms of business ownership in California. Two of the most common forms of business ownership are corporations and limited liability companies (LLCs). The main difference between a corporation and an LLC is the nature of their formation, liability, and taxation. Corporations are more formal and require more paperwork to form - such as the filing of articles of incorporation with the state. Corporations also provide limited liability protection for the owners, meaning if the corporation is sued, the owners are not personally liable. Finally, corporations are subject to double taxation, meaning they must pay corporate income tax on profits and then owners must also pay personal income taxes when they are paid dividends by the corporation. LLCs provide limited liability protection to owners similar to a corporation but with less paperwork when forming the company. LLCs are not subject to double taxation, but are instead taxed as a “pass-through” entity. This means that the profits of the LLC are “passed through” to the owners, who then pay personal income tax on their portion of the LLC profits. It is important to consider the differences between a corporation and an LLC when setting up a business in California. Depending on the type of business and the owners’ individual needs, one form of business ownership may be more beneficial than the other. It is important to contact a legal professional to ensure the correct form of business ownership is used.
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