Comparing the LLC and the Corporation

Insurance & Asset Protection

When choosing an organizational form for your business, you have many options to choose from, but some are much better than others in terms of maximizing asset protection.

Both the corporation and the limited liability company (LLC) provide limited liability for all of the owners of the business, among their other advantages. In addition, both allow for business to be conducted across state lines, although this may require foreign qualification and the selection of a registered agent.

Usually the LLC, rather than the corporation, will present a better choice for the small business owner. This is mainly because the LLC is a low-cost, simpler alternative to the corporation. This accounts for the fact that the LLC is the fastest growing business form in the United States.

Warning

Don't confuse the LLC with the limited liability partnership (LLP). There are some important differences between the two forms in terms of liability.

Typically, the LLC's advantages over the corporation include:

lower state formation and renewal fees (in some states)
less complex and burdensome operating rules
simplified taxation
Better asset protection for the owner's business interest against the claims of personal creditors, because of the Revised Uniform Limited Partnership Act (RULPA) lineage of the charging order concept applied in many states
Better protection for the owner's personal assets outside the business, as the doctrine of piercing the veil of limited liability is less likely to be applied to the LLC due to its simplified operating rules
Better integration with other planning techniques, including domestic asset protection trusts and estate planning strategies, such as the family limited liability company

The corporation may have the edge in three limited situations:

Going Public. When the small business owner intends to make a public offering of securities that is broad-based (e.g., an Internet offering), a corporation may be more appropriate than an LLC. While the same objective can be accomplished with an LLC, the investing public is more accustomed to purchasing common stock in a corporation, and state securities regulators are more familiar with an offering of common stock. In future years, this probably will not be the case.
Self-Employment (Social Security) Tax. It is possible, although not likely in most cases, that the corporate form would result in lower self-employment taxes than the LLC.
Fringe Benefits. Currently, the regular C corporation can provide a greater amount and more kinds of fringe benefits, tax-free, to its owners, as compared to an LLC. However, small business owners operating a corporation generally will elect subchapter S corporation status. This election will mean that the business will enjoy no fringe benefit advantage over the LLC. Further, the most important fringe benefit, tax-free health insurance, is currently being phased-in for LLC owners (and all self-employed individuals) by federal law. Finally, the LLC can simply elect to be taxed as a C corporation and enjoy the same tax-free fringe benefits advantage, although the benefits derived from such an election will almost never outweigh the disadvantages associated with being taxed as a C corporation.

In short, the small advantages the corporation may seem to have over the LLC usually turn out to be illusory.

In this section, we'll examine state fees, simplicity and low cost of operation, and tax implications, as well as explain why the LLC will generally hold the advantage.