Definition of incorporation A legal business entity separate from the individuals who founded it.
Advantages and Disadvantages of each Think about your short and long-term goals for your company
LLC benefits Protects business owners from being held personally liable for the actions of the LLC. Flexibility in management-as opposed to a corporation who has a set management structure where Directors oversee the major business decisions and Officers are responsible for the day-to-day business operations.
LLC benefits Pass through taxation-taxes not paid at the business level. Income/loss reported on personal tax return. Any taxes due pain on individual level.
Corporation characteristics S corp as a “pass-through” tax entity, like the LLC. C corp is taxed as separate entity; subject to “double taxation” if corporate profits are distributed to shareholders in the form of dividends. C corp pay tax on profits first at the entity level and then pay taxes at the individual level on profits received as dividends=double tax.
Similarities of LLC and S Corp Limited Liability Protection-Owners typically not personally responsible for business debts and liabilities. Separate entities-both are separate legal entities created by state filing. Pass through taxation-both typically are although S corps must file business tax return. LLC’s only file business tax returns if the LLC has more than one owner. With pass-through no income taxes paid at business level.
Similarities of LLC and S Corp Business profit or loss is passed-through to owners’ personal tax returns. Any necessary tax is reported and paid at the individual level. State requirements –Both subject to state-mandated formalities: Filing annual reports Paying necessary fees
Differences in Management Owners of LLC can choose to have members or managers manage the LLC. When members manage, the LLC is like a partnership. If run by managers, LLC resembles a corporation: members not involved in day- to-day business decisions S corp have directors and officers. Board of Directors oversee corporate affairs and handle major decisions but not daily operations. Directors elect officers who manage daily affairs.
Differences in ownership and formalities Ownership-IRS restricts S corp ownership, but not LLC’s. Restrictions: LLC’s can have unlimited number of members; S corps can have no more than 100 shareholders. Non-US citizens/residents can be members of LLC’s; S corps may not have non-US citizens/residents as shareholders.
Differences in ownership and formalities S corps cannot be owned by C corps, other S corps, LLC’s or many trusts. LLC’s allowed to have subsidiaries without restriction. Required formalities for S corp: Adopting bylaws, issuing stock, holding initial and annual director and shareholder meetings, keeping meeting minutes with corporate records.
Other differences Transferability of ownership-S corp stock is freely transferable so long as IRS ownership restrictions are met. LLC membership interest typically is not freely transferable-approval from other members are often required. Self-employment- S corps may have preferable self-employment taxes compared to the LLC because the owner can be treated as an employee and paid a reasonable salary. FICA taxes withheld paid on that amount.
Other differences Corporate earnings after payment of the salary may be able to be treated as unearned income that is not subject to self-employment taxes. Business losses- “S corp advantage” allows business owners to use business losses, i.e. start up phase, on their personal tax returns as deductions.
Other differences Self-employment taxes-S corp can provide savings on self-employment or Social Security/Medicare taxes and it allows owners to offset non-business income with losses for the business-unlike C corps which are complete separate tax entity.
Other differences Dividends and venture capitalists-C corps are often the preferred incorporation choice of developing businesses. Owners can hold different types of stock interests which allow for different levels of dividends. Earnings-C corps can retain and accumulate earnings from year to year.