What is a corporation?

A corporation is one of the four general ways you can choose to organize your business (the other three being as a sole proprietorship, as a partnership or as a limited liability company). Like partnerships and limited liability companies, a corporation is a separate legal entity from its owners, and it can live beyond the life of any of the individual owners. Corporate owners are known as shareholders. Many times a corporation is not run or controlled by its shareholders. Instead, the corporate directors manage the corporation and the officers operate it on a day- to-day basis (of course, the role of shareholders, directors and officers can often be mixed, and for small corporations, there may just be one or more shareholders who also run and control the company).

One of the major advantages to the corporate form is that it offers protection to its owners in the form of limited liability, meaning the owners are not personally liable for losses, debts and obligations of the business itself. Corporations are also useful for raising money and capital, as they can sell shares of stock, allowing investors to become partial owners. Of course, running your business as a corporation also has certain disadvantageous, particularly the fact that the law is more controlling of corporations, requiring various formalities to be strictly followed.

It should be noted that many state laws do not allow certain organized professionals to run their business as a corporation (or, for that matter, as an LLC). For example, in many states, lawyers or doctors can not join together in a corporation because the state has decided that these professionals should not be entitled to the strict limited liability afforded to corporate owners. In such states, these professionals will often form a limited liability partnership instead, as this is the most protection they can obtain when not permitted to form a corporation or LLC.

What is a limited liability company?

A limited liability company, typically referred to as an LLC, is one of the four general ways you can choose to organize your business (the other three being as a sole proprietorship, as a partnership or as a corporation). LLCs are a newer type of business entity, as most states did not have laws recognizing the LLC form until the 1980’s. Over the last few decades, however, LLCs have become very popular due to the fact that they combine some of the most attractive features of both partnerships and corporations. Specifically, LLCs afford their owners the same type of limited liability associated with corporations, meaning that LLC owners are not generally personally liable for the business’ debts and losses. However, compared to corporations, LLCs are relatively easy to set up and the LLC form provides more flexibility than the corporate form - in this regard, LLCs are more akin to partnerships.

It should be noted that many state laws do not allow certain organized professionals to run their business as an LLC (or, for that matter, as a corporation). For example, in many states lawyers or doctors can not join together in an LLC because the state has decided that these professionals should not be entitled to the strict limited liability afforded to LLC owners. In such states, these professionals will often form a limited liability partnership instead, as this is the most protection they can obtain when not permitted to form an LLC or a corporation.