Or When is Correct Terminology Important?

Often a business or estate planning client will ask us to set up an entity known as a limited liability company (an LLC), rather than a corporation. Sometimes, we will hear a client refer to a limited liability company as a limited liability corporation or otherwise use terminology that is not quite accurate. Some self-help organizations that provide forms and limited assistance to help a person set up an LLC have referred to the entity as a limited liability corporation. Is there a difference? Are the terms “corporation” and company interchangeable?

The answer is yes to the first question and no to the second.

The owners of a corporation are referred to as shareholders or stockholders. Their tangible proofs of ownership are stock certificates. The stock certificates are most often issued in numbers of shares to each shareholder. The shareholders elect the directors of the corporation who set the policies and oversee the corporation’s overall direction. The directors also elect officers who control and direct the daily activities of the corporation. Although a corporation is allowed to use the word company as part of its official name, the LLC may not use “corporation” as part of its name.
The LLC is a legal entity owned by members, rather than stockholders. They may be issued ownership certificates as their tangible proofs of ownership, and these certificates are stated in units or percentage interests for each member. The LLC is operated by either its members (a “member-managed LLC”) or managers (a “manager-managed LLC”). If the LLC is manager-managed, the members elect or appoint the manager or managers, as the case may be.

So, when picking an entity, it is important to recognize and use the terminology that is appropriate to the entity desired. My experience with some clients is that they tend to interchange terminology particular to each of these two entities, thereby resulting in confusion.

If you are considering forming either of the above entities, your questions are welcome.

Darlene Lundy
Certified Paralegal
dlundy@mclawfirm.com
480-994-2000

Is a Limited Liability Company a Corporation? 1