Starting a business can be a daunting task, especially when it comes to the law processes involved in it. The main issue to consider is whether you want to form a Corporation or a Limited Liability Company (LLC). Simply put, members are the owners of an LLC and shareholders are the owners of a corporation.
Of course, members and shareholders both have different roles and different rights. Sometimes a person can be both a shareholder and a member. It could be a bit confusing for someone who doesn’t have enough commercial law knowledge. Still, knowing the basic differences between a shareholder and a member is crucial to anyone wanting to start their own business.
In this article, we will discuss all the differences between these two legal terms to help you prepare for the process of forming your own company.
What is an LLC member?
A member is someone whose personal information is included in official registry documents. Being a member of a Limited Liability Company means that you only risk losing the capital you invested in the company. If someone wants to sue your company, they are not allowed to sue you the (owner) directly, they can only sue the business. This means that you’ll never have to cover anything your company owes from your own bank account.
As LLC members, you and your partners can decide whether you want to manage the business yourself, or you want to hire managers to do it for you.
Other than that, becoming a member of a Limited Liability Company is a pretty straightforward process. There are three ways to achieve this: signing the memorandum of association, investing in the company, and through ownership transfers.
What is a shareholder?
A shareholder is anyone who owns shares in a company. Of course, not every shareholder is the same. Depending on the type of shares they own, they can have different rights. Some shares give you voting rights while others do not. Active shareholders who do have voting rights are involved in the most important decisions. Passive shareholder rights are limited to the right on a dividend.
Becoming a shareholder is simple- you have to buy company shares. Some shareholders can also be a part of the board of directors which makes them the members of the company.
Shareholders don’t participate in daily management. Those who have voting rights only vote when there is a big decision to be made, like for example a merger with another business entity.
So how do I form an LLC or a Corporation?
Well, firstly, you should expect a lot of paperwork. The best advice is to get a good lawyer to assist you in this process. It could be too complicated for someone who is not experienced or knowledgable enough, and getting a good law firm to do it for you is much more efficient. Of course, if your business is a small start-up, getting your own attorney can seem to be too expensive for you. If that’s the case, don’t worry, there are tons of cost-effective online services that can help you. You can learn more here when it comes to those.
If you want to do it yourself, you should remember that the process can be a bit confusing. When it comes forming LLC, you’ll have to decide the legal name for your business, choose a legal agent (someone who will manage your legal papers), file your formation document, create an operating agreement (ownership rights and responsibilities), and finally getting an EIN (a number that uniquely identifies your LLC).
Forming a corporation is a bit more complicated. Firstly, just like when forming an LLC, you’d have to choose the name for your business, then appoint directors, file articles of incorporation, write your corporate bylaws, draft a shareholders’ agreement, hold a board of directors, issue stocks, obtain business permits and licenses, and register with the IRS.
This is all a bit more complicated than it sounds, so getting a lawyer to ensure everything is done right is of utmost importance.
Should I choose LLC or Inc?
This mostly depends on your needs as a business owner. The most important thing to know is that both a Limited Liability Company and Corporation become separate legal entities when formed. This means that both of those are separated from the owner, they exist as a legal entity with their own legal responsibilities and rights. This is how you’re protected from personal liability when it comes to your company affairs.
The other thing is, a corporation is required to have more internal information displayed to the public than an LLC does. This is only logical since a potential buyer of shares wants to know as much as possible about the state of the company before purchasing any stocks.
The concept of Limited Liability
Before you form your own company, you should understand the concept of limited liability first. As we previously mentioned this legal concept protects you of personal liability if your company gets sued or suffers debt. Still, you have to know that this concept won’t protect you from any liability.
There is another concept in commercial law known as „Piercing the corporate veil“. This protects all third parties from your own wrongdoings. If you breach a contract, or purposefully damage someone’s property in the company’s name, or try to scam anyone, the court may decide to hold you personally accountable.
This is the same for both LLC and Inc, as they both work as entities separate from their owners.
The main difference between members and shareholders is the type of ownership. Owners of LLC are registered as members, and owners of corporations are shareholders. You become a member by investing capital into the LLC and signing an agreement, and you become a shareholder by buying stocks. As a shareholder, you have a right to a dividend. What to choose will mostly depend on your business needs and preferences.
When forming a business the best course of action is to seek legal advice and assistance. It could save you a lot of time and money.