The Difference Between Co., Corp. and LLC: Understanding Business Structures
There are a lot of important decisions to make when you’re starting up a business. But before you can put a plan of action together, choosing the type of entity you want your business to operate as is crucial. Finding the right entity for your business helps you understand the organizational and legal structures of the corporate world.
But which structure will work best for your specific goals and objectives? And how will they align with how your business operates day to day?
With so many abbreviations to follow in modern business, a lot of terms can come up during organizational discussions. However, are aspiring business people aware enough of what they actually mean? Here’s what you need to know about the difference between Co., Corp. and LLC to help you choose the appropriate business structure.
What Is a Co.?
The abbreviation Co. usually refers to “company” in the name of a business entity. The term mainly refers to any kind of commercial business run by a group of people. While this abbreviation is commonly used, it’s a generic term that doesn’t offer any deeper insight into how a company is set up legally. Companies can be almost any size and variation, including business structures like sole proprietorships, limited liability partnerships or limited partnerships.
While it’s rare, a Co. can sometimes refer to an abbreviation for a corporation.
What Is a Corp.?
The abbreviation Corp. stands for corporation. A corporation creates a separate distinction between a business entity and its owners. This business type can issue stock and is owned by those shareholders. A corporation is a separate legal entity that pays taxes on its income and distributes dividends to shareholders, who then pay taxes on those dividends as income. Some corporations avoid double taxation by electing to become a pass-through corporation, which means all income and losses pass to shareholders.
Examples of corporations include global names like Coca-Cola, Amazon and Apple, which have shareholders who may receive a return on some of the business’s profits. However, some corporations, like charitable organizations or fraternal entities, will be nonprofits.
What Is an LLC?
A limited liability company (LLC) also creates separation between owners and the business, though the specific structure can vary depending on the statutes of the state in which it operates. Owners of an LLC are called members. LLCs do not have a maximum member capacity, and many allow individuals, corporations and even foreign interests as members. LLCs are pass-through entities by default and cannot issue stock.
Some businesses cannot operate as an LLC, including insurance companies, banks and medical practices. If you’re considering forming an LLC, it’s important to check the specific business laws in your state.
Is a Limited Liability Company a Cooperative?
There’s understandable confusion between LLCs and co-ops due to the varying factors affected by state laws.
Like an LLC, a co-op provides legal separation of the owners and the business entity, protecting the members from debt and legal obligations. However, cooperatives are usually run to meet a unified goal and share profits with members. Unlike other business types, co-ops generally distribute profits based on how much members use the co-op. Similarly, each member gets one vote regardless of how much they invest in the business.
The Main Differences Between a Co., a Corp. and an LLC
Learning the pros and cons of each business entity is essential for small to medium enterprises looking to choose a business structure. By understanding how each option is structured, you can ensure you make the best choice for your business’s growth.
Benefits of Running a Co.
For locally focused small businesses, forming a general company can offer many benefits, including:
- Ease: Setting up a company as something other than a corporation or LLC can be relatively straightforward in comparison.
- Business size: For many small businesses, there is no advantage to registering as a corporation or LLC. As your business grows, that may change.
- Company profit: With many company types, all profits go to the sole owner or partners.
Challenges of Running a Co.
Running a general company can offer some limitations and challenges, such as:
- Company liabilities: In many cases, the owners are personally responsible for any debts and legal liabilities. Personal and business assets are not separated.
- Raising your capital: Raising money may be difficult, as banks may view a small business as a high-risk investment, and you cannot issue stock.
Benefits of Running a Corporation
A corporation is formed after a business has been incorporated by one or several shareholders, which offers a range of potential benefits.
- Reduced shareholder liability: Unless they have committed extreme misconduct, a corporation shareholder can’t be held liable for company liabilities.
- Raising company capital: A corporation can sell stock or shares in the company to raise extra capital.
- Potential tax benefits: While specifics depend on the state where the business operates, corporations may get additional tax breaks or incentives.
Challenges of Running a Corporation
- Double taxation: Despite tax incentives for some types of organizations, many corporations are subject to double taxation.
- Management structure and admin: Corporations will have a rigidly defined structure of directors, officers and shareholders, which comes with additional administrative pressures.
- Time and paperwork: Forming a corporation can be a lengthy process that requires extensive paperwork and adherence to strict regulatory guidelines.
Benefits of Running a Limited Liability Company
- Simplicity: While LLCs are defined by state law, forming an LLC is simple compared to creating a corporation.
- Tax flexibilities: LLC members report profits and losses on their tax returns, which avoids double taxation. However, LLCs can elect to be taxed as a corporation.
- Freedom: An LLC doesn’t require a board of directors or meticulous records, reducing a business’s administrative burdens.
Challenges of Running a Limited Liability Company
- Lifespan: In most states, an LLC will operate only as long as the tenure of its members. When a member leaves an LLC, the business will likely be dissolved, leaving legal burdens on the other members.
- Additional fees: The costs to form an LLC tend to be higher than those of a general company.
Choosing Between Forming a Co., a Corp. and an LLC
Before making a final decision, ask yourself the following questions about what you want to achieve:
- What are your short-term business goals?
- What are your longer-term goals?
- Are you operating as a single vision or a collective unified under one clear mission?
- Do any of these entities fit your organizational vision?
- What are your funding plans for the business?
- Do you have a specific tax preference for your organization?
Get Support From NCBA CLUSA International
If your business goals reflect a community-inspired collective more than a corporate entity, we’re listening and ready to help. As the co-op that represents all cooperatives, the National Cooperative Business Association (NCBA) CLUSA collaborates across various industries and states to solve challenges for our clients.
Learn more about our global impact and work to support cooperatives everywhere.
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