What is the main difference between a LLC and a Domestic Profit Corporation in Michigan?
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Answer:
Limited Liability Company A Limited Liability Company (LLC) is a separate legal entity that can conduct business just like a corporation with many of the advantages of a partnership. It is taxed as a partnership. Its owners are called members and receive income from the LLC just as a partner would. There is no tax on the LLC entity itself. The members are not personally liable for the debts and obligations of the entity like partners would be. Basically, an LLC combines the tax advantages of a partnership with the limited liability feature of a corporation. An LLC is formed by filing articles of organization with the secretary of state in the same type manner that articles of incorporation are filed. The articles must contain the name, purpose, duration, registered agent, and principle office of the LLC. The name of the LLC must contain the words limited liability company or LLC. An LLC is a separate legal entity like a corporation. Management of an LLC is vested in its members. An operating agreement is executed by the members and operates much the same way a partnership agreement operates. Profits and losses are shared according to the terms of the operating agreement.
Corporation Business corporations are created when a branch of the State government approves articles of incorporation prepared by incorporators. In Michigan, this branch of government is the Secretary of State. Corporations formed for profit have to have shareholders, directors and officers. The shareholders are responsible for electing the board of directors. The board of directors are ultimately responsible for the management of the business, but they employ or elect officers who run the day-to-day operations. Corporations may range in size from an incorporated one-person business to a large multinational business.
Advantages: One advantage is that the shareholder's risk of loss from the business is limited to the amount of capital that the shareholder invested in the business. Also, a corporation can raise capital by issuing stock which can allow the corporation to expand. A corporation is a separate legal entity (a legal person) and can own property, make contracts, bring lawsuits, and be sued as a person.
Disadvantages: A corporation is required to pay corporate income taxes. Shareholders who receive dividends from the corporation are required to pay personal taxes on these dividends. This results in double taxation which may certainly be a disadvantage against incorporation of small businesses with just a few shareholders (e.g., close corporations). One way around double taxation in a close corporation situation where the shareholders also work for the corporation, is to make sure that they receive salaries and bonuses sufficient to wipe out any profits that would have to be distributed as dividends. However, any salary and bonus paid cannot be more than what would be reasonable considering the type of business the corporation is involved in. If the salary is unreasonable, the IRS may declare that part of the salary is really a dividend, and tax the corporation on this portion as well as the individual.
