Corporate shareholders and limited liability company members both have ownership interests in the business entity of which they are a part, but there are many differences between the two. Management rights, transferability, debtor accessibility and receipt of profits differ between shareholders and LLC members.Taxation also differs dramatically between LLCs and corporations, though the extent of difference depends in part on how the LLC has elected to be taxed and the type of corporation.
The management structure of an LLC is set privately by an operating agreement between the members. This operating agreement sets out whether the members will have management duties or whether they should hire a manager. The operating agreement also defines voting rights, buy-out provisions and terms for dissolving the LLC. These terms can generally be decided upon by the members themselves. Corporate governance is more formal, more public and more tightly controlled by statute. Articles of incorporation must be filed with the state corporations office, and state statute mandates the extent to which bylaws must be maintained and minutes of meetings kept. LLC members, as well as shareholders in closely held S corporations, are usually actively involved in the business management, while shareholders in general business corporations may often be arms-length investors, uninvolved in running the business.
Limits and Transferability
General business, or C corporations, can issue large numbers of shares of different classes, but C corporation income is taxed at both the corporate and shareholder level, so small business owners tend to choose between LLC and S corporation structures. Between these two pass-through entities, S corporation share issuance is much more limited than LLC membership. S corporations can only issue one class of stock, and no more than 100 shares, all of which must be to individuals who are US citizens. LLC memberships are unlimited in number, may be issued in different classes with different rights and responsibilities, and may be held by other business entities and foreigners.
Profits and Taxation
LLC operating agreements may choose to grant an interest in profits to only some members or classes of members. S Corporation profits are distributed on a per-share basis, and cannot vary between shareholders. LLC members generally must pay self-employment taxes on income derived from the LLC. Corporate shareholders, even shareholders in closely-held S corporations, do not have to pay self-employment taxes on their profits. Corporations issue stock certificates that indicate a shareholder's interest, while LLCs are not required to issue pieces of paper to indicate ownership. General corporation stocks can be broadly sold and transferred, while S corporation stock transfers must be to eligible shareholders and LLC membership transfer limits are set out in the operating agreement.
Read More: LLC Profits and Disbursement Rules
Corporate shares, even in an S corporation, may be seized by judgement creditors of the shareholders. If the judgement creditor secures enough shares, he or she may acquire a controlling interest over the business. Judgement creditors of an LLC member, however, can only receive a charging order entitling them to the distributions that the LLC member would have received, and cannot seize the membership itself.
- The CPA Journal: Partnerships, LLCs, LLPs and S Corporations
- Southern Law Journal Volume 18: A Comparison of the Advantages of Forming a Limited Liability Company Versus an S Corporation
- Pennsylvania Institute of Certified Public Accountants: Is it Better for a Company to Organize As An LLC Rather Than an S Corp?
- American Bar Association GPSolo Magazine: LLC Operating Agreements: Drafting Tips and Traps for the Unwary
A freelance writer since 1978 and attorney since 1981, Cindy Hill has won awards for articles on organic agriculture and wild foods, and has published widely in the areas of law, public policy, local foods and gardening. She holds a B.A. in political science from State University of New York and a Master of Environmental Law and a J.D. from Vermont Law School.