What's the difference between a Corporation and an LLC?

There are a number of differences, too many to really list effectively. That said, a few important notes. In Arizona, one of the largest differences is annual reporting. A corporation will file annual reports with the state and pay a fee each year. An LLC will not. In terms of the ability of the entity to provide protection to the owners, there is little difference if set up correctly. There can be differences in terms of taxes. On that note, let's turn to the S-Corp. When you set up an entity, you elect the applicable tax treatment. With a corporation, this is generally a C corp or S corp. There is no real difference in the entity, just the manner in which taxes are done. With an LLC, you can elect almost any tax treatment. You may be a disregarded entity and do taxes on your personal return, you can be a partnership (K), C corp or S corp. It is something you and your CPA will want to discuss prior to formation and pick the model that best fits your long term needs. Forming an entity, whether an LLC or Corporation, is easy. Making sure it is the right one for you long term takes good advice from an attorney and a knowledgeable tax professional.

There are a number of differences in terms of how they operate, are managed, and are owned, and they use different terms and documents. However, the main difference relates to taxes. An LLC is by default taxed in the same manner as a partnership (one layer of tax), whereas a corporation is taxed differently, having two layers of tax. An S-corporation is just a corporation which has elected to be taxed as such by making an S-election. The taxation of an S-corporation has characteristics of both corporate and partnership taxation, but is more similar to a partnership. There are a number of other types of differences between entity types, which would take a very long time to explain, however, I have recently written an article on the different entity types, which should be of help in understanding the issues.

If one starts with a corporation, it is a separate legal entity different from the legal identity of its owners, called shareholders. Unless you make an election with the IRS, it is a C corporation and will be taxed as such. You may make an election for the corporation not to be separately taxed, but to have the tax obligations pass through to the owner/shareholders. The pass-through election is called qualification as a Subchapter S corporation. A corporation, an foreigner, and a trust cannot be a shareholder in a Subchapter S corporation. In order for corporations, foreigners and trust to be owners of a pass-through tax treatment entity, LLCs were created about 25 years ago. They can either be taxed as a separate legal entity, or can elect pass-through tax treatment. There are some other differences, and one state will differ a bit from another, but that's a beginning.