There's a big difference between the limited liability company, LLC, and a corporation, but the underlying idea is the same.
You start a business, and whether it's say, a property investment company or a producer of edible products, you face liability issues. This should be obvious. But, in the first example, suppose a roof beam falls on someone. Liabilities come with any business. Of course there's insurance. A business that doesn't obtain a general business line isn't thinking clearly. But there are other issues.
Star Trek fans, remember the deflector shields that protected the starship against attack? Think of the corporate or LLC entity as separate and distinct from you and your family. Think of it as a vessel into which you place your business, separate from the people who run the business. The separate entity shields the individuals involved.
That's the good news. The other news is that the business becomes a separate entity in the eyes of the IRS and state taxing authories. That can be bad news for smaller business owners who feel burdened by filing individual tax returns plus forms for the LLC or corporation. But, it's good news in terms of deductions that are allowed to a business entity, but not to individuals.
Never create any business entity without a detailed consult with an accountant first.
Those are the similarities between these entities. Now for the differences.
Corporations require many formalities. You need to file Articles of Incorporation with the Secretary of State. You must then have a meeting of incorporators, the people forming the corporation. Then, shareholders and the board of directors must have meetings. Corporate bylaws must be adopted. Another requirement is that corporate ownership must be expressed in terms of numbers of shares. Actual stock certificates must be issued to the shareholders. Stock certification must be documented in a permanent stock register.
These are just a few of the basic corporate formalities. By contrast, an LLC is relatively simple. An LLC is started by filing a Certificate of Formation and an attachment with the Secretary of State. An operating agreement is reccomended to define the roles of the parties in the company. But, that's pretty much it.
While the corporation requires piles of paper, the LLC is relatively simple. No stock certification, bylaws or multiple meetings, with the required notices and minutes. Where corporate law requires annual meetings, LLC owners only need to hold formal meetings if they feel like it. They may alter their structure pretty much by signing simple amendments. Corporate changes require burdensome notice or waiver of notice requirements, just for starters.
Both entities must be treated as the separate entities they are in order for the "shield" effect to be respected by the courts. The business needs to be properly capitalized. That's where a business plan comes in. At its simplest, there should be adequate funds, or a way to find them quickly, to meet payroll and bills in advance. Corporate or LLC owners and managers must act for the good of the company. If they're simply out to pocket cash quickly to the detriment of others, courts can disregard the entity.
Under the legal concept of "piercing the corporate veil," a court can assess individual liability against owners who have used the corporate identity to promote 'injustice or fraud.' The idea that the entity is independent of its owners in such a case is disregarded, for example, where there is substantial depletion of corporate assets to the detriment of creditors, investors or others. Few small to mid sized businesses incorporate anymore. There are few advantages. But the big companies will never give up their corporate status. They've always done it that way; they see it as a 'status symbol' and they have skyscrapers full of attorneys to keep up with the paperwork.