CA Corporation v. LLC, What is the Difference?

A business entity may be formed in California by filing the applicable documents with the Secretary of State. To create a Corporation, an Articles of Incorporation Form must be filed. To create a Limited Liability Company ("LLC"), an Articles of Organization, or Form LLC-1, must be filed. Once the business is formed it must be registered with the Secretary of State for its necessary license along with a Fictitious Business Name.

But what is the difference between a Corporation and an LLC?

Filings Requirements

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Corporations

A Corporation is a distinct legal entity owned by its shareholders. It may be owned by a single person who can be the Corporation's sole director and serve as any required officer. The shareholders elect the Corporation's board of directors but are not otherwise active in the management of the Corporation. The board of directors is responsible for major corporate decisions. Day-to-day management is carried out by the corporation's officers. A corporation has an unlimited life and is taxed as a separate legal entity.

It is taxed on its net income (gross income less allowable deductions) at rates ranging from 15% to 35%. Property, other than money, contributed to a corporation will be subject to tax unless the person, or group of persons, contributing to the property owns at least 80% of the corporation. The proper operation of a corporation limits the liability of the shareholders because the creditors of the corporation usually cannot reach the shareholders to satisfy the corporation's obligations. In such events, a court may determine to pierce the corporate veil and hold shareholders personally liable.

LLCs

The owners (referred to as members) of an LLC have no personal liability for the obligations of the LLC. The LLC may be formed with only one owner. Further, its operating agreement is tailored toward its needs pertaining to financial obligations of members, governance, profit-loss distribution and more. An LLC is very attractive for businesses financed by corporate investors and, to a lesser extent, by wealthy individuals, because of passive-loss limitations.

LLCs are often favorable for start-up clients seeking flow-through losses to its investors because it offers the same complete liability protection to all its members as does a corporation, and because its losses can be allocated to investors. An LLC may also be incorporated tax-free at any time.

If you need assistance in your Corporation or LLC formation, it is beneficial to retain experienced and professional attorneys to assist you with this matter. Please call Aziz Legal by phone at (408) 203-4627 or email us at abid@azizlegal.com.

This article is merely informational and is not intended to be used as legal advice. Use of any information from this article is for general information only and does not represent personal legal or tax advice, either express or implied. Readers are encouraged to consult Aziz Legal, or another attorney, for any specific legal matters.