Creditor Protection for the company.
- Both corporations and LLCs provide creditor protection for the owner. That is, if the company gets sued, the shareholders should be protected from that lawsuit through the limited liability concept for corporations and LLCs.
- However, if an owner of corporate stock is sued personally (a lawsuit unrelated to the business), the corporation is at risk. If a judgment is obtained, a judgment creditor can acquire ownership of the corporate stock. This ownership would allow the creditor to vote the stock, including voting to liquidate the company.
- An LLC borrows an idea from partnership law that will protect each LLC owner from the other LLC owners. That is, if you are sued personally, the company is not at risk. A judgment creditor is not allowed to acquire ownership in the company and gets no voting rights. Instead, the only remedy available to the creditor is a “Charging Order”. This means that if the LLC were to pay distributions or dividends, the judgment creditor is entitled to those distributions. But since the judgment creditor cannot vote, the creditor cannot force the LLC to make distributions. Charging orders are likely only available under NC law when there are other LLC owners to protect. A single-member LLC is not likely to have this benefit.
- A corporation (even a small corporation) is managed by a formal Board of Directors and Officers, which is often overly rigid for a small business. An LLC allows for more informal and flexible management, through a role called a Manager.
Income Tax Status
- I am including a section on income taxes for the sake of being comprehensive. The reality is, income tax status is generally not driven by the state level choice of entity. That is, an LLC can elect with the IRS how the LLC is to be taxed. Whether your corporation is taxed as a C Corporation or as an S Corporation, your company can choose to maintain its current tax status even after converting to an LLC. If you keep your tax status, the change to an LLC, for IRS purposes, is essentially just a name change.