Limited Liability Companies (LLCs) vs. Corporations in Tennessee: Understanding the Key Differences
It's important to note that when it comes to choosing the right business structure for your company, the decision should be based on your specific circumstances. However, understanding the general differences between LLCs and corporations can help you make a more informed decision. LLCs and corporations are both popular business structures that offer personal liability protection and have different tax implications.
What is a limited liability company (“LLC”)?
An LLC, or limited liability company, is a type of business structure that combines elements of a corporation and a partnership. LLCs offer personal liability protection for their owners, called members, similar to a corporation, but are not taxed as a separate entity like a corporation. Instead, the company's profits and losses are "passed through" to the members and reported on their individual tax returns. This is known as "pass-through taxation." This feature makes LLCs a popular choice for small businesses and startups.
Some examples of liability protection under an LLC include:
Protection of personal assets: Members of an LLC are generally not personally liable for the company's debts or liabilities. This means that their personal assets (such as their home, car, and bank accounts) are generally not at risk in the event of a lawsuit against the LLC or if the LLC is unable to pay its debts.
Limited liability: The liability of each member is limited to the amount of money that they have invested in the LLC. This means that if the LLC is sued, members will not have to pay more than the amount of money they have invested in the LLC.
Protection from co-member's actions: In an LLC each member's liability is limited to their own actions, so if a co-member does something that leads to a liability, other members will not be held responsible.
Creditor protection: Creditors of an LLC generally cannot go after the personal assets of the members to collect a debt or judgment.
It's worth noting that these protections can vary depending on the laws of the state in which the LLC is formed, and that there are certain scenarios where the personal assets of members can be at risk, such as if the members have personally guaranteed a debt.
What is a Corporation?
A corporation is a type of business structure that is considered a separate legal entity from its owners. This means that the corporation can enter into contracts, sue and be sued, own assets, and pay taxes, separate from its shareholders. Further, there are a variety of different types of corporations (i.e. C-Corp, S-Corp, Non-profit, etc.).
Corporations have shareholders who own the company and elect a board of directors to make important business decisions. The board of directors hires the management team to run the day-to-day operations of the company. The shareholders elect the board of directors and are also entitled to a share of the company's profits through dividends.
One of the key benefits of a corporation is limited liability protection for shareholders. Shareholders are not personally liable for the company's debts or liabilities. This means that their personal assets (such as their home, car, and bank accounts) are generally not at risk in the event of a lawsuit against the corporation or if the corporation is unable to pay its debts.
Another benefit of a corporation is that it has the ability to raise capital through the sale of stock. Corporations also offer continuity of existence, meaning that even if its shareholders or directors change, the corporation will continue to exist.
It's worth noting that corporations are subject to more regulations and formalities than other types of business structures, and they also have to pay corporate income taxes on their profits, which can be a disadvantage.
[Book a Free Consultation today or send us an email. ]
Some examples of these regulations and formalities include:
Compliance with securities laws: Corporations that issue stock to the public are subject to federal and state securities laws, which require them to disclose certain financial and other information to shareholders and the public.
Holding regular meetings: Corporations are required to hold regular meetings of shareholders and directors, and to keep minutes of these meetings.
Keeping accurate records: Corporations are required to keep accurate financial records and to prepare annual financial statements.
Filing annual reports: Corporations are required to file annual reports with the state in which they are incorporated.
Paying corporate income taxes: Corporations are subject to corporate income taxes on their profits, which can be a disadvantage.
Double taxation: Dividends paid to shareholders are subject to double taxation, once at the corporate level and again at the personal level when the dividends are included in the shareholders' taxable income.
Formalities in decision making: corporate decisions must follow a specific process as defined by the bylaws and the laws of the state of incorporation, including holding meetings, voting and record keeping.
Overall, the regulations and formalities that corporations must comply with can be more complex and time-consuming than those for other types of business structures, and may require additional legal and accounting services.
Conclusion
When it comes to choosing the right business structure for your company, it's important to understand the key differences between an LLC and a corporation. Both LLCs and corporations offer personal liability protection and have different tax implications, but the extent of protection and the tax treatment can vary depending on the state in which the business is formed. That's why it's important to speak to both a lawyer and a tax professional to get the best advice for your unique situation.
At Anderson Legal, we offer a free consultation to discuss your specific needs and help you determine the best business structure for your Tennessee company.
Book a Free Consultation today or send us an email.
Disclaimer:
The information provided on this blog is for general informational purposes only and is not intended to serve as legal advice. While we strive to ensure that the content is accurate and up-to-date, laws and regulations are subject to change, and the application of the law can vary based on specific circumstances. Therefore, the information presented here should not be relied upon as a substitute for professional legal counsel.
If you have a legal issue or require advice on a particular matter, we strongly recommend consulting with an attorney who can provide guidance tailored to your unique situation. The use of this blog or any of its content does not create an attorney-client relationship between you and our firm.