LLC Vs. Corporation

Your business form must fit your business needs. And as your business grows or personal situation changes, so will your needs. Keep in mind that your decision on business structure will have an impact on the amount of tax you and your company will pay.

There are distinct advantages and disadvantages of each form of doing business. Which is right for you? That’s a decision made between you and your team of financial and legal advisers. And remember, you must consider state and local taxes when evaluating business structure.

If it’s been awhile since you last reviewed your business structure, contact us to discuss your alternatives. And, for a side-by-side comparison of each business form, keep on reading.

C Corporations

C corporations are taxed as separate entities from their shareholders. The corporation pays taxes, and you pay taxes as an employee. Investors are taxed on the dividends they receive.

C corporations can offer more fringe benefits, but they may receive more IRS scrutiny. Salary paid to you and other shareholders must be reasonable or a portion of it may be reclassified as a nondeductible dividend payment. If earnings are accumulated beyond the reasonable needs of the corporation, an additional tax of 15% will be imposed on these earnings.

Corporate Income Tax Rates

If Taxable Income Is Between:

Your Tax Is:

Of The Amount Over:

$---- ---- --0
50,001
75,001
100,001
335,001
10,000,001
15,000,001
18,333,334

-
-
-
-
-
-
-

50,000
75,000
100,000
335,000
10,000,000
15,000,000
18,333,333
and above

---- 15%
$---- 7,500 + 25%
13,750 + 34%
22,250 + 39%
113,900 + 34%
3,400,000 + 35%
5,150,000 + 38%
a flat 35%

$---- ---- --0
50,000
75,000
100,000
335,000
10,000,000
15,000,000

Personal Service Corporations — 35% flat tax rate.
Capital Gains Tax Rate — Same as regular rate.

S Corporations

S corporations are an advantageous entity option since they normally pay no tax and pass through income and losses to shareholders. S corporations may have up to 75 shareholders, which can be individuals, estates, certain trusts, and tax-exempt organizations.

S corporations are permitted to own any percentage of the stock of other corporations. And, if they own 100% of a qualified corporation, that subsidiary may elect "S" status. But, the qualified subsidiary is a disregarded entity for tax purposes.

If you’re employed by your S corporation, you and the corporation may be able to save some FICA taxes by minimizing your salary. However, if your salary is deemed to be unreasonably low, the IRS will attribute additional salary to you. Plus, your future social security benefits may be reduced.

Partnerships

Partnerships, like S corporations, are popular because they avoid corporate double taxation.

Family limited partnerships can also offer a number of benefits. They may allow you to split income with your children, realize estate tax savings, and continue to keep effective control over assets you transfer to the partnership.

However, family limited partnerships must be carefully formulated since the IRS is watching them closely.

LLCs & LLPs

Limited Liability Companies (LLCs) and Limited Liability Partnerships (LLPs) have been viewed as the best of all worlds, offering flow-through taxation, limited liability, and flexible structure.

The structure of the LLCs and LLPs allows any entity, including corporations, to be owners. Also, special allocations of income and losses, and investment in other entities are not limited under the LLC and LLP structure.

Sole Proprietorship

In a sole proprietorship, your personal return is your business return. But, if you risk substantial liability in your business, consider some form of incorporation, LLC, or LLP, to protect your personal assets.

Summary

Comparing Business Structures Which one is right for you?
	Tax Rates	Liability
C Corporation	Federal marginal tax rates from 15% to 39% with an overall maximum rate of 35%. Possibly taxed again at distribution. Shareholders pay tax on dividends. Losses do not pass through to shareholders.	Shareholders are shielded from personal liability for business debts. Only their investment is at risk.
S Corporation	Generally, no federal tax on the business entity. Income and expenses are allocated among shareholders. Taxable income is subject to individual rates from 10% to 35%, whether profits are distributed or not. Losses pass through to shareholders. Restrictions on loss deductibility apply. State treatment of S corporations may vary.	Shareholders are shielded from personal liability for business debts. Only their investment is at risk.
General Partnership	No federal tax on business entity. Income and expenses are allocated among partners and each pays tax of 10% to 35% (plus self-employment tax, if applicable) on their share of partnership profits whether distributed or not. Losses pass through to partners. Restrictions on loss deductibility may apply.	Personal liability rests with each partner.
Limited Liability Company & Limited Liability Partnership	No federal tax on business entity. Income and expenses are allocated to "members" or "partners" and each pays tax of 10% to 35% (plus self-employment tax, if applicable) on their share of LLC or LLP profit whether distributed or not. Losses pass through to members. Restrictions on loss deductibility may apply.	Members and partners are shielded from personal liability for business debts. Only their investment is at risk.
Sole Proprietors	Reported on Schedule C of Form 1040. Income is subject to individual rates of 10% to 35%, plus self-employment tax.	Personal liability for all aspects of the business.

Legal Business Structures Table

TYPE

OWNERSHIP

CONTROL

LIABILITY

TAXATION

Sole Proprietorship

Individual

Controlled by Owner

Owner is personally liable for all business debts

All business income is considered personal income to the owner and is taxed at personal income tax rates

General Partnership

Two or more individuals or other entities according to partnership agreement

Controlled by the partners in accordance with partnership agreement

All partners are jointly and severally liable for all partnership debts

Individual partners’ prorated share of partnership income or loss is included on the respective income tax return of the partner and taxed at personal or corporate rates

Limited Partnership

Two or more owners; two classes of owners; general partners and limited partners

General partner(s) may dissolve at their discretion, limited partners do no have this option. General partners generally run business, as specified in partnership agreement

General partner(s) are fully liable for all business debts, limited partners only liable to extent of capital invested

Same as general partnership

“C” Corporation

Shareholders (Unlimited number)

Owners share ownership through stock, and business is managed through a Board of Directors; certain legal regulations also apply

Owner’s liability is limited to amount of capital contributed unless acting as guarantor of corporate debt

Corporation pay tax on business income at corporate tax rate; profits distributed to shareholders and are taxed at personal income tax rate

Subchapter “S” Corporation

Shareholders

Same as “C” Corporation Above

Same as “C” Corporation above; generally limited to assets in corporation

Corporation not taxed; income is taxable to the shareholders at their personal income tax rate

Limited Liability Company

One or more members

Controlled by members or managers, as set out in operating agreement

Generally, same as “C” Corporation above

Taxed as partnership, corporation or may be disregarded depending on election made. See “Check the Box” regulations

Limited Liability Partnership

Two or more owners; limited partners

Controlled by partners in accordance with partnership agreement

Limited and General partners only liable to extent of capital invested

Same as general partnership

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