LLC vs CORPORATION
Presented by Lonnie Woods, Esq
THE WOODS LAW FIRM
www. WoodsLawFirmPC.com
LLC vs corporation
Options
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
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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 dayto-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.