Is an LLC, or Limited Liability Company, a Corporation?
No. An LLC, also known as a limited liability company, is not the same thing as a corporation.
Getting the LLC vs Corporation Terminology Right
By the way, you sometimes see people write “limited liability corporation” or hear people use the phrase, “llc incorporation.” Both of those terms are usually erroneous because an LLC isn’t a corporation. And a corporation isn’t an LLC. The two things closely resemble each other–a bit like the way that an alligator resembles a crocodile. But they aren’t the same thing.
Incorporation vs. LLC Formation
Specifically, an LLC differs from a corporation in a couple of key ways. First, the process for creating an LLC differs from the process for creating a corporation. Granted, the process doesn’t differ much. But the difference still exists. (To most small business owners, the differences would probably seem like a “six of one, half of a dozen of the other” thing.)
Differences in Governance: Corporation versus Limited Liability Company
A second difference between an LLC and a corporation is that the rules for operating (and governing) an LLC and a corporation differ. As a generalization, LLCs are easier to operate. With an LLC, either the LLC owners (who are called members) run the entity, or a manager or group of managers run the entity. In either case, the members or managers follow the operating rules provided by the operating agreement.
In comparison, with a corporation, operations are more formal and, as a result, more complicated. Typically, with a corporation, the corporation’s owners (called either shareholders or stockholders) elect a governing board of directors. This board then elects officers (including typically a president, a treasurer, a secretary, and sometimes vice presidents) to run the corporation on a daily basis. On a regular basis, with a corporation, the board of directors meets to make sure things are operating smoothly. Every once in a while (usually annually), shareholders meet to elect a new board of directors. To make sure that all this stuff happens the way it should, the shareholders, board and officers follow corporate bylaws.
Let me say that corporations are the “older” entity. In other words, the laws that created the corporate form are old (decades and decades old in most states), and even centuries old in some countries. The laws that created the LLC form are, well, teenaged. LLCs, a pretty new legal technology, have been around for only about two decades.
LLCs Provide Extra Tax Flexibility
One other quick comment about distinguishing between LLCs and corporations: If you start trying to compare and contrast these two entities, you need to understand that the differences are mostly to do with state laws–and not to do with tax laws. And here’s where this gets tricky: An LLC can for tax purposes be pretty much anything it wants to be.
In other words, an LLC for tax accounting purposes can be treated as a sole proprietorship, a partnership, a regular corporation or even an S corporation. (This flexibility, by the way, is often the reason that accountants and attorneys love the limited liability company.)
A small business corporation, in comparison, is either treated for tax purposes as a regular corporation, also known as a C corporation, or as an S corporation.