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Apr 23 2009

LLC v Business Corporation

by John Gordon | 11:04 GMT

LLCs and corporations are different in more ways than just letter combination. Each derived from different types of laws, and therefore come with significant baggage.

Corporations, owned by shareholders and ruled by a Board of Directors through hired officers, are the result of centuries of entrepreneurs using other people’s money to produce profits. This led to protection of those investors from unforeseen events caused by the entrepreneurs. The Board was developed as an oversight of the operation, to protect the shareholders from unscrupulous managers, and therefore is strictly liable to look after the shareholder’s investment. Like a corporate republic, shareholders are the “citizens” of the company, with one vote for each share of stock they own. They use the total number of shares to vote for the directors they favor to govern the republic.

Boards hire managers to run a company day to day. Although top management is usually on the board as well, prudent shareholders also want independent directors to ensure that the insiders are not putting their interests before that of the owners. Shareholders themselves are forbidden from running the company – that has been delegated to the board members and the management they hire. Shareholders also cannot just walk into their investment’s place of business and grab something off the shelf; they can only receive benefits granted by the managers – primarily the dividends granted from profits generated from the company or capital gains from selling shares of the company at a higher price than what they bought the shares for. Shareholders are not liable for anything done by the corporation beyond the risk of the capital invested (the definition of “limited liability”), in exchange for which the shareholder has no control over the management of the invested company.

Click here to learn about LLCs



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