Why corporation over llc

Develop and improve products. List of Partners vendors. Choosing the right business structure is crucial to the success of your business. An LLC is a limited liability company, which is a type of legal entity that can be used when forming a business. An LLC offers a more formal business structure than a sole proprietorship or partnership. It also offers protection to the owner from personal liability for any of the debts that a business incurs.

In other words, the personal assets of the owner can not be used for legal claims against the business. LLCs are common because they provide the liability that's similar to a corporation, but they are easier to establish. While LLCs and S corporations two terms are often discussed side-by-side, they actually refer to different aspects of a business. An LLC is a type of business entity, while an S corporation is a tax classification. An S corporation provides limited liability protection but also offers corporations with shareholders or fewer to be taxed as a partnership.

An S corporation is also known as an S subchapter. In some instances, a business may be both an LLC and an S-corporation. You can form an LLC and choose to be taxed as an S corporation, but your business can also operate under the default taxation system for LLCs. The business structure that you choose can significantly impact some important issues in your business life. These issues include exposure to liability and at what rate and manner you and your business are taxed.

It can also impact your financing and your ability to grow the business, the number of shareholders the business has, and the general manner in which the business is operated.

Both LLCs and S corporations surged to the forefront around the time of the Small Business Job Protection Act of , which contained a number of changes to basic corporate tax law, such as enabling S corporations to hold any percentage of stock in C corporations.

Limited liability companies LLCs are popular due to their basic benefits of liability protection and are typically used by a sole proprietor single owner or a company with two or more owners partnership. LLCs protect the owners' personal assets from losses, company debts, or court rulings against the company. LLCs may also provide some tax benefits since they are taxed differently than a traditional corporation—or a C Corporation.

An LLC can be used for a company of any size, such as a doctor's or dentist's office, or as a legal entity that owns commercial property. Before establishing an LLC , entrepreneurs should consider the various characteristics that are associated with forming an LLC, which include the following. An LLC is allowed to have an unlimited number of owners, commonly referred to as "members. Also, LLCs may be owned by any other type of corporate entity, and an LLC faces substantially less regulation regarding the formation of subsidiaries.

For LLCs, business operations are much simpler than other corporate structures, and the requirements are minimal. While LLCs are urged to follow the same guidelines as S corporations, they are not legally required to do so. Some of these guidelines include adopting bylaws and conducting annual meetings. For example, instead of the detailed requirements for corporate bylaws for S corporations, LLCs merely adopt an LLC operating agreement , the terms of which can be extremely flexible, allowing the owners to set up the business to operate in whatever fashion they most prefer.

LLCs are not required to keep and maintain records of company meetings and decisions in the way that S corporations are required to do. The owners or members of an LLC are free to choose whether the owners or designated managers run the business. If the LLC elects to have the owners occupy the company management positions, then the business would operate similarly to a partnership. Limited liability companies are taxed differently from other corporations. An LLC allows pass-through taxation, which is when the business income or losses pass through the business and are instead recorded on the owner's personal tax return.

As a result, the profits are taxed at the owner's personal tax rate. A single-member LLC is typically taxed as a sole proprietorship. Any profits, losses, or deductions that are business expenses that reduce taxable income are all reported on the owner's personal tax return. An LLC with multiple owners would be taxed as a partnership, meaning each owner would report profit and losses on their personal tax return.

LLCs avoid the double taxation to which C corporations must pay because they pass all company income through to the tax returns of the individual owners. A C corporation or C-corp is a legal structure for a corporation in which the owners, or shareholders, are taxed separately from the entity.

C corporations, the most prevalent of corporations, are also subject to corporate income taxation. The taxing of profits from the business is at both corporate and personal levels, creating a double taxation situation. Below are several of the steps involved in forming an LLC. However, please check with your local state since they may have additional forms and requirements. It's important to note that the above list is not comprehensive since each state may have additional requirements.

Once established, many states require LLCs to file an annual report, which the state may charge a fee. These fees can sometimes run in the hundreds of dollars per year. There are distinct advantages and disadvantages to establishing and operating a limited liability company. LLC Pros As stated earlier, an LLC gives the owner or owners limited liability, which means that each owner is not personally liable for any company related lawsuits or any debts that belong to the company. Profits and losses are reported on the individual tax returns for the owners, and not at the business level.

As a result, filing taxes is often simpler for owners of an LLC. Any losses or operating costs of the business can be deducted on personal tax returns, which can help offset other income.

The rate at which an LLC is taxed depends on the total income of the owner, as it does when you file as a sole proprietor.

Owners of an LLC may also be required to pay self-employment taxes. Some states require LLCs to pay a franchise tax.

This is a tax issued by the state for the privilege of doing business in that state. Franchise taxes are usually paid annually and vary from state to state. What happens if you do not pay your taxes? Failing to pay on time or at all could result in penalties and even the involuntary dissolution of your business. Luckily, incorporating as an LLC provides entrepreneurs with flexibility.

While it is an uncommon choice, filing an LLC as a C Corp tax designation does make financial sense for some businesses. Corporations are taxed as a separate legal entity, which can earn its own income. Corporations are responsible for paying tax on their profits, corporate tax , and tax on dividends the entity distributes to its shareholders.

Since dividends are not tax deductible like salaries and bonuses , dividends are taxed twice. This is referred to as double taxation. This is not an issue for smaller corporations where only the owners work for the corporation. Instead, owners receive tax deductible salaries and bonuses. While double taxation is seen as a disadvantage for businesses choosing to file as a corporation, this additional tax responsibility can often be offset by federal deductions that are only available to corporations.

For example, a corporation may deduct all its business expenses. These can include advertising costs and operating expenses as well as certain employee fringe benefits such as medical and retirement plans.

These deductions all add up to substantial savings over time for the business. This allows the owners of the corporation to save on taxes by investing some profits back into the business. Keep in mind if a corporation has fewer than shareholders, it can file an S Corporation election. This is a tax status that allows a business to be treated as a pass-through entity much like an LLC. This may be a good option for businesses who want to be taxed like an LLC, but also want some of the additional formalities a corporation provides.

The S Corporation designation does allow flow-through taxation no corporate tax , but there are certain requirements to qualify as an S Corp that may limit its utility to a business. Keep in mind that an LLC's distribution of profits are subject to an employment tax, whereas an S Corp's dividends are not.

For more information about how an S Corporation filing might help you save each year on taxes, check out our S Corporation Tax Calculator. With careful planning, a small business can avoid significant employment taxes by electing to become an S Corp. However, there can be drawbacks of an S Corp that may deter a small business from taking this advantage. You can learn more about the differences between corporation and LLC taxes here in our learning center.

Ownership is another important aspect to keep in consideration when deciding between whether to form an LLC and a corporation. The structure of ownership in each entity is very different, and each has a clear purpose which makes choosing the right entity for your business a bit easier. A Key feature of the LLC is charging order protection. In strong states like Nevada or Wyoming, if the owner of a business gets sued, an attacker can only get a charging order a lien to the distributions of the LLC.

If there are no distributions, the attacker gets nothing. The charging order in most cases is contingent on the entity having at least two owners, but Nevada and Wyoming have protections for the single member LLC. It should be noted that in some states, like California, Georgia and New York, the court may still order a sale of the businesses assets. Learn more about protecting your assets through incorporation here.

C Corporations are a good to foreign owners for the same reasons stated in the sections above, but It may be more popular with countries that have similar taxation. For example, most Canadians prefer to use a C Corporation because the taxation of a C Corporation most closely resembles that of their home country. When the systems are closely related, it makes them easier to manage. The LLC is great for both asset protection and has flow-through taxation, and they are affordable to set up and maintain.

Since they have flexible taxation, they can be set up for easier taxation management too. Often Canadians will use an LLC taxed as a C Corporation for ease of use, and Australians use them as-is for real estate investment of their retirement monies. Visit our foreign investor page for more information on setting up an entity as a foreign investor. Determining which entity is right for you can be challenging. You want to ensure that you are getting set up properly right from the start.

If you need help figuring out what entity is right for your business, set up a free minute consultation with our incorporation specialists. View Larger Image. Who Should Use Which Entity?

Members can choose how they are taxed. They can be treated as a sole proprietorship, a partnership, or a corporation. The most common tax option of an LLC is taxation similar to a sole proprietorship. The profits and losses of an LLC are passed through the business to the owner. The owner then has to report the profits or losses on their own personal tax returns. The LLC itself does not pay any corporate tax.

This method avoids double taxation, which is a drawback of corporations. Although an LLC does come with plenty of advantages, there are some disadvantages to consider. LLC members also have to pay a self-employment tax , which includes a There are other drawbacks to an LLC as well. The purpose of an LLC is to protect its members from any liability.

If the company fails to meet its obligations, only the LLC can be a target for creditors, not the assets of the members. However, there are certain situations in which an LLC can be automatically dissolved, leaving members open to risk.

Automatic dissolution can be triggered if an LLC fails to report its filings on time, a death or withdrawal of any member occurs, unless succession provisions are outlined in the operating agreement, a change in the structure of the LLC, such as a merger , as well as any terms with expiration dates. In these situations, an LLC can continue doing business, but the liability structure of the members may alter, defeating the initial purpose of creating the LLC.

Prior to the passing of the Tax Cuts and Jobs Act in , an LLC treated as a partnership for tax purposes could automatically be terminated due to tax reasons as well.

This rule no longer applies from the tax year and beyond. Another major disadvantage is the differences among states in the statutes that govern LLCs.

This can lead to uncertainty for LLCs that operate in multiple states. The differences in rules and regulations can result in additional paperwork and inconsistent treatment across different jurisdictions. Despite the ease of administration of an LLC, there are significant advantages to using a corporate legal structure. Two types of corporations can be formed: an S corporation and a C corporation.

An S corporation is a pass-through entity, like an LLC, where the owners are taxed on profits and losses of the corporation. A C corporation is taxed at the corporate level, separately from its owners, through a corporate income tax.

C corporations are the most common type of corporation. C corporations have the advantage of allowing profits to remain with the corporation and paying them out as dividends to shareholders.