LLC vs. Corporation

Comparing Business Entities: LLC vs. C-Corporation

Taxation Differences:

• LLCs and C-Corporations undergo distinct tax treatment.
• By default, an LLC operates as a pass-through tax entity, meaning its income is not taxed at the company level. However, a Multi-Member LLC must file a separate tax return, with income or loss “passed through” to individual members for reporting on their personal tax returns.
• C-Corporations, conversely, function as separately taxable entities. They pay taxes on income before distributing dividends to shareholders. Dividend income, when distributed, is taxed as regular income to shareholders, without allowing the corporation a deduction for reasonable business expenses.

Structural Variances:

• LLCs offer more structural flexibility compared to corporations. This allows for tailoring the LLC structure to suit unique business needs. The Operating Agreement of an LLC can be customized in numerous ways.
• Corporations maintain a formal structure with mandatory officers and directors. In contrast, an LLC can be “member managed,” allowing for less formal operations. Reduced formality benefits small businesses by enabling a focus on revenue generation over administrative tasks.

Comparing Business Entities: LLC vs. S-Corporation

Income Allocation Distinctions:

• While S-Corporations avoid double taxation, they lack the income allocation flexibility of LLCs. LLCs can have multiple membership interest classes, whereas S-Corporations are typically limited to a single class of stock.

Ownership Parameters:

• LLC ownership is open to any number of individuals or entities, with no restrictions on subsidiaries. In contrast, S-Corporations have a 100-shareholder limit and cannot be owned by certain entities, including C-Corporations, trusts, LLCs, and non-resident aliens.

Self-Employment Tax Considerations:

• S-Corporations offer a unique advantage in self-employment tax calculation. Owners must receive a salary, and their self-employment tax is based on this salary (excluding S-Corporations based in New York City). LLC owners, however, pay self-employment taxes based on all member distributions received.

Comparing Business Entities: C-Corporation vs. S-Corporation

Tax Treatment:

• C-Corporations commence as standard entities and are subject to income tax on taxable earnings. They may elect S-Corporation status by filing federal form 2553 with the IRS.
• S-Corporation income or loss is “passed-through” to shareholders and included in their personal tax returns. This structure avoids double taxation at the corporate level, contrasting with C-Corporations.

Income Allocation Differences:

• S-Corporations, also known as Subchapter S-Corporations, are capped at 100 shareholders and cannot be owned by specific entities, such as C-Corporations or non-resident aliens.