Is An LLC A Corporation? Everything You Need To Know

8 Mar 2023
220 ITN Is an LLC a Corporation

Deciding the business entity for your company is a decision that requires a good grasp of legal entities in the U.S. as well as an understanding of your company’s goals, operations, capabilities, and structure.

In this article, we will address the question “Is an LLC a corporation?” from business planning, tax, and management perspectives.

What Is A Corporation?

A corporation is a business entity made up of many owners, called shareholders, who can sell their ownership stakes. These shareholders have the option to transfer shares, buy additional stock to own more of the company or sell stock to hold less of it.

The management structure of a corporation is significantly rigid. A corporation must be legally organized and have a board of directors to manage the business and produce profits for the shareholders. Corporate officers are tasked with managing the day-to-day business operations. The shareholders are regarded as the corporation’s owners, but they may not be involved in business decisions or day-to-day operations.

What Is Limited Liability?

Limited Liability Corporation or LLC is a type of business entity that can be created by one or more individuals. The owners of an LLC are also called members. An LLC is free to allocate ownership stakes to its members without taking into account each member’s financial investment in the LLC. Entrepreneurs may form an LLC to get liability protection for their personal assets.

The management structure of an LLC is flexible. Any member may serve as the LLC’s manager, and the entity may be run by its members or a team of managers. The LLC may also decide not to distinguish between a business’s owner and manager. The management of an LLC is less formal due to its versatile nature.

Is It Better To Have A Corp Or An LLC?

Now that we’ve answered “Is an LLC a corporation?”, is one better than the other? Generally, both corporations and LLCs are advantageous and flawed in their own ways. It then comes down to business planning.

A corporation might be the best legal entity for your business if:

  • You want to secure startup capital
  • You have plans to sell the company
  • You want to decide on owner and staff pay
  • You intend to offer health insurance

An LLC might be the best legal entity for your business if:

  • You anticipate making a loss and you want the owners to absorb those losses
  • You like a flexible organizational structure
  • You want to keep official yearly meetings and associated documentation to a minimum
  • You want flexibility in profit-sharing

Are Limited Liability Companies Taxed Differently Than Corporations?

One aspect in answering “Is an LLC a corporation?” is tax. Choosing between an LLC and a corporation is a big decision that may or may not be influenced by taxation.

Companies are C corporations and are subject to double taxation by default. First, they pay company taxes and submit a corporate tax return. If the shareholders get distributions from the business, they are responsible for declaring and paying personal income taxes on those payments, as well as any corporate salaries they may have received. Double taxation is when both the company and the shareholders are taxed.

In contrast, LLCs do not have their own IRS tax classification. Multi-member LLCs are automatically taxed as partnerships, whereas single-member LLCs are automatically taxed as sole proprietorships. The members pay income and self-employment taxes on their portion of the company’s profits. This can incur a hefty price tag on taxes alone.

What Are Some Examples of LLCs?

Because LLCs are so common, you won’t be surprised to find that a service or product you are familiar with is an LLC. Here are some famous LLCs in the U.S. that you may recognize:

  • Hulu – This subscription streaming service is no stranger to people who like to wind down at the end of the day. Founded in 2007, Hulu LLC is now a major part of the Walt Disney empire, with Comcast also owning a third of Hulu shares.
  • Sony – Have you ever owned a PlayStation? Sony Interactive Entertainment LLC oversees the development and expansion of the PlayStation in the US, Canada, and Latin America. It is just one of the subsidiaries of Sony Corporation of America.
  • Wendy’s – Wendy’s International, LLC was founded by Dave Thomas in 1969 in Ohio serving up beef hamburgers. Today, the restaurant has 7000 franchises in the U.S. and 1000 international chains. There’s no stopping Wendy’s.
  • Open AI – Everyone is talking about ChatGPT, and you as a business owner have likely heard about it too. The developers of ChatGPT are Open AI LLC, with notable names such as Microsoft, Reid Hoffman, and Khosla Ventures as investors.
  • Hertz – Hertz is one of the three biggest car rental companies in the U.S. and even has operations in 160 countries. The parent company itself is a Corporation whose many subsidiaries are registered as LLCs.

A business can be an LLC and still vary in company size, revenue, investors, years of establishment, and more. These companies have found ways to make their business work, whether it’s an LLC or a corporation.