llc vs corporation presented by lonnie woods, esq the woods law firm www. woodslawfirmpc.com
TRANSCRIPT
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.