What Is the Difference of a Shareholder Vs. an LLC Member?
Businesses vary greatly in terms of the types of products and services they provide to consumers, but all businesses must choose from a few basic legal structures that govern how they are managed and taxed. Common business structures include sole proprietorships, partnerships, corporations and limited liability companies. The owners of corporations are called shareholders, while the owners of limited liability companies are called members.
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Basics of Corporations
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A corporation is a company that sells shares of stock to investors. Each share of stock represents a small share of ownership in the corporation. Shareholders collectively appoint members of an executive board who direct the company and appoint high level managers like the corporation's chief executive officer. Shareholders have limited liability for the business's activities, so if the business fails, shareholders are not responsible for paying for the business's debts or other obligations out of their own pockets.
Basics of LLCs
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An LLC is a type of business that shares certain characteristics in common with both corporations and partnerships. The members of an LLC jointly own and manage the company. According to SBA.gov, members can consist of a single individual, two or more individuals, corporations and even other LLCs. Similar to the shareholders of a corporation, the members of an LLC have limited liability for a business's debts, so members don't have to tap into their personal finances to cover the business's liabilities if it fails.
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Company Management
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One of the main differences between LLC members and corporate shareholders is that LLC members may have more direct control over the management and day-to-day operations of a company. Shareholders rely on executive board members to direct corporations and even board members don't directly manage company operations. A single shareholder may have little say in what actually goes on in corporation.
Taxation
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Another major difference between shareholders and the members of an LLC is the way that the IRS regards income for tax purposes. In an LLC, company profits get reported on the personal income tax returns of the members and each member pays self-employment taxes on business income. A corporation is considered an independent tax entity and the corporation itself pays taxes on profits. Shareholders pay taxes on income distributions they receive as dividends and on capital gains realized when selling shares of stock.
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