Corporation and LLC, franchising

Solution Preview

What are the differences between a traditional corporation and an LLC? What are the advantages and disadvantages of each? What is a franchise? How is it formed, and how does it operate? What are the advantages and disadvantages of franchising.

A limited liability company, or "LLC", is an unincorporated business entity which is a cross between a corporation and a partnership. Like a corporation, an LLC protects its members from personal liability for the debts and obligations of the company. Like a partnership, an LLC is typically formed by the filing of a "certificate of formation" or similar certificate with the Secretary of State and is taxed like a partnership. Also like a partnership, the members of LLCs typically enter into an operating agreement which establishes how the LLC is managed. This agreement controls the management of the company and how the members relate to each other. The advantages of LLC are the liability protection with the flexibility, pass through taxation of a partnership, no requirement of an annual general meeting for shareholders, no loss of power to a board of directors (although an operating agreement may provide for centralization of management power in a board or similar body), and tax election as a sole proprietor, partnership, S-corp or corporation, providing much flexibility. The disadvantages are the difficulties in raising capital, requirement for operating agreement, and the unfamiliarity with the LLC structure of many newer businessmen or low-level clerks.

A traditional corporation, which is the most common corporate structure, is a legal business entity created by state statute separate from its owner(s). It can be owned by an unlimited number of stockholders, all of whom enjoy limited liability protection. A stockholder's personal liability is usually limited to the amount of investment in the corporation and no more. The corporation is taxed on profitable income at special, corporate rates. Corporations have unlimited life extending beyond the illness or death of the owners, and can raise capital by selling stock in public offering and trading ...