Know the differences between LLCs and Corporations

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  • Author Alan Cowgill
  • Published February 4, 2011
  • Word count 566

There are differences between LLCs and corporations. First off, corporations go back centuries. LLCs only go back roughly thirty years. In fact the first one was started in Wyoming. The basic idea of an LLC is to serve as a hybrid between a corporation and a partnership.

But the basic idea was to come up with a structure that’s going to make it simpler for people who want to bring in other owners of the business. At the same time, they were still looking for ways to minimize their taxes and to protect their personal assets. The Limited Liability Corporation or LLC was formed.

There are no shares in an LLC. They’re called units with an LLC. Units are similar to shares in that they can be bought, and they can be sold.

One of your strategies may be if you want to bring money into your company is to offer people units as opposed to promissory notes. But the key to remember is it’s a measure of ownership. So the unit holders are just like the share holders in a corporation. Those are the people who run it.

The term you typically hear them called is members. If you own an LLC you are a member of it. You can give yourself a working title and run the company.

But what the law calls you is "manager". Whether you’re doing it yourself or you’re talking to an advisor, there’s member managed LLCs and manager managed LLCs.

You might reach a point with your LLC where you think about bringing in someone else who’s going to bring in some money for your company.

If you’ve setup your LLC to be member managed that means they get to help run the company too. It’s all done on a percentage basis. So just remember when you set up your company, your decisions will have a long term impact. So if you run a member managed company anyone who buys in and you make a member now has a vote based on their ownership in the company.

If you call it a manager managed company there’s a difference. It means that the members elect the people who run the company. So as long as you control enough units to make sure you decide who the managers are going to be, you’re fine.

There is no board of directors with an LLC. Management serves as the board of directors.

In a corporation the Board of Directors hires and fires officers.

So let’s go down the road a little bit. You’ve built up a very successful corporation. You have built it up so well that people are now saying they’d like to be on your Board of Directors or you want to bring them in because they offer insight and advice. You have to keep in mind that when you hire a Board of Directors, you’re hiring people who can fire you. Make sure you avoid the backstabbers.

The Board of Directors technically chooses the officers, so the share holders elect the directors. Now this is irrelevant if you’re doing an LLC. There is no distinction between the Board of Directors and managers in an LLC.

These are factors you have to take into consideration when deciding what kind of company you want to have.

E. Alan Cowgill is the owner of Colby Properties, LLC. and President of Integrity Home Buyers, Inc. Since 1995, Alan has bought and sold hundreds of single family and small multi-family investment properties. His home study system, 'Private Lending Made Easy', shows others how to find private lenders for their very own real estate business.

His website is http://www.supercoolsystems.com

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