Is an LLC Incorporated or Organized? Key Differences

A frequent point of confusion for new entrepreneurs is the terminology surrounding business structures. A Limited Liability Company (LLC) is “organized,” not “incorporated.” The term “incorporation” is reserved exclusively for the creation of a corporation. While both entity types provide owners with a shield against personal liability for business debts, they are distinct legal structures with fundamental differences in formation, ownership, and taxation.

Core Legal Identity of LLCs and Corporations

The creation of a corporation is legally known as incorporation. This process is finalized by filing “Articles of Incorporation,” which formally establishes the corporation as a legal entity separate from its owners, who are known as shareholders. The Articles of Incorporation include the corporation’s name and the number of shares it is authorized to issue.

In contrast, a Limited Liability Company is brought into existence through organization. This involves filing “Articles of Organization,” which creates the LLC as its own legal entity, shielding its owners from personal liability. The owners of an LLC are referred to as members. The information required usually includes the LLC’s name, its principal address, and its management structure.

Key Distinctions in Ownership and Management

Corporations have a formal management hierarchy. Ownership is held by shareholders, who exercise their control by electing a Board of Directors. This board is responsible for major strategic decisions and appoints officers, such as a Chief Executive Officer (CEO), to handle daily operations.

LLCs offer a more flexible approach to governance. State laws provide two main management structures: member-managed and manager-managed. In a member-managed LLC, which is the default structure in most states, all members have the authority to participate in the daily management of the business and can bind the LLC in contracts.

Alternatively, an LLC can be manager-managed, a structure that must be specified in its formation documents and operating agreement. In this model, the members appoint one or more managers to run the business. These managers can be members themselves or outside individuals, allowing some members to act as passive investors while designated managers handle operations.

Contrasting Tax Treatment

The tax treatment of corporations and LLCs highlights one of their most significant differences. A traditional corporation is classified as a C Corporation for tax purposes and is subject to double taxation. The corporation first pays federal income tax on its profits, and when those profits are distributed to shareholders as dividends, the shareholders must pay personal income tax on that same income.

LLCs, by default, are treated as pass-through entities by the Internal Revenue Service (IRS), which means they avoid entity-level taxation. A single-member LLC owner reports all business income on their personal Form 1040 tax return. A multi-member LLC is taxed as a partnership, filing an informational Form 1065, with profits and losses passed through to the members.

An LLC has tax flexibility. By filing IRS Form 8832, an LLC can choose to be taxed as a C Corporation. Furthermore, by filing Form 2553, an LLC can be taxed as an S Corporation. This election does not change the LLC’s legal structure but allows it to retain pass-through taxation while potentially offering savings on self-employment taxes for its members.

The decision to change tax classification is a significant one, as an LLC generally cannot change its election again for 60 months. This underscores the importance of careful consideration when making such an election.

Administrative and Compliance Formalities

Corporations are subject to administrative and compliance requirements to maintain their legal standing. State laws mandate that corporations adopt bylaws, hold annual meetings for both the board of directors and shareholders, and keep detailed written records of these meetings, known as minutes. Failure to comply can jeopardize the liability protection that the corporate structure provides.

LLCs are characterized by far fewer state-mandated formalities. Most states do not legally require LLCs to hold annual member meetings or maintain extensive minutes, which simplifies administration. This reduced administrative burden is an advantage for many small business owners.

It is a best practice for an LLC to adopt a comprehensive Operating Agreement. This internal document functions much like corporate bylaws, defining the rules for the business. A well-drafted operating agreement outlines member ownership percentages, voting rights, profit distribution, and procedures for handling the departure or addition of members.