There are several fundamental differences between corporations and LLCs. Determining those differences can have a direct impact on your business.
Corporations are much older entities. They have traditionally been used to save money on self-employment taxes and to provide protection for businesses. This prevents any potential business lawsuit from affecting the owner’s personal assets.
Unfortunately, one of the downsides of the corporation is that the stocks are vulnerable to personal lawsuits, such as divorces, bankruptcies, car accidents, etc. There was a case in California several years ago where a 17-year-old was involved in a DUI. He had no resources so the litigant sued the father. Due to the nature of a corporation’s stock, he was able to force the liquidation of his father’s multi-million dollar computer business to pay off the settlement.
This is not the case with an LLC. With an LLC, if the shares are in foreclosure, the litigant has financial rights but no voting rights. They cannot force the LLC’s managers to liquidate anything within the entity. Due to this unique ownership of the LLC, this makes the LLC an excellent vehicle where there is some intrinsic value within the entity.
LLCs are commonly used for stocks, bonds, real estate, domain names. anything of value. I even established an LLC for a rancher in Deaf Smith County, Texas to protect his herd of cattle. He was an organic rancher and many of the outlying ranches hired him to feed their cattle. By establishing the LLC, rather than a corporation, if one of the animals was left on the road and caused an accident, you were protecting your personal assets. On the contrary, if he had a personal or any kind of lawsuit, no one could force him to liquidate his herd.
Please note that this is only one factor to consider. Different states also have different tax implications for corporations and LLCs. For example, in California, C corporations, S corporations, and LLCs are taxed differently.