Our last post compared LLCs and Partnerships. If you’re starting your own business, enjoy today’s post comparing some tax advantages for LLCs and corporations.
LLC (Limited Liability Company) vs. Inc. (Corporation)
The biggest advantages of an LLC over a corporation are flexibility in management and pass-through taxation. While corporations must have a formal management structure – electing boards and officers, holding annual meetings, and keeping formal meeting records – LLCs do not. Forming a corporation will cost more money in terms of accounting and legal fees. But there are advantages, too.
Corporations can issue stock (to attract investors) and are allowed to split income to help lower their tax liability. Corporations also do not have to pay self-employment tax. Corporate profits/losses are divvied up proportionate to the percentage of stock each shareholder owns, but an LLC can divvy up profits based on any kind of operational agreement the owners choose.
For example, if an LLC has two owners who each own 50% of the business but one does 90% of the work, the LLC can divide the profits 90/10, while a corporation would have to divide the profit 50/50.
Another consideration is if you think your business might want to raise capital down the road, venture capitalists (VC) typically are not allowed to invest in LLCs, but can invest in general corporations. In general, if you want a simple, flexible business structure the LLC may be your best bet. If your business goals include growing large, selling stock, going international, and you want to be able to split taxes between the business and your personal income, incorporating may be the way to go. So, which type of corporation is right for you – S-corp or C-corp?
S-corp vs. C-corp
Under the U.S tax code, there are two types of corporations: an S-corporation and a C-corporation. The C-corp is what most people think of when they hear the word corporation. These are typically larger, formal businesses that hold and sell stock, have a board of directors and report earnings each quarter, often in the news. A C-corp is subject to “double taxation”, meaning it pays corporate taxes on earnings and then its shareholders pay taxes on any corporate dividends that are distributed to them. Of all the business structures, a C-corp provides the most risk protection for its owners and is the most formal.
An S-corp (sometimes referred to as a subchapter S corporation) is a special type of C-corp with some interesting advantages: it only has to report tax
earnings once a year (instead of quarterly), and it passes its tax liability through to its shareholders (like an LLC). That means the corporation avoids double taxation. However, S-corps are limited to no more than 100 shareholders and only one basic class of common stock, while C-corps can have unlimited shareholders and multiple classes of stock. S-corp owners must also be U.S. citizens or naturalized residents. Both types of corporations continue to exist even if the owner(s) die or leave the company.
Check out the handy chart to the right for an easy comparison.
Choosing your business structure can make a real difference in your success – in terms of both time and money. So be sure to consult your favorite accountant and/or legal counsel to guide you through the process. And if you know what type of business you want to start, Team Holly can help. Just contact us today!
Do you have a partnership, LLC or incorporation story to share? Please share in the comments below!