Benefits of LLC vs Corporation: Everything You Need to Know
One of the main benefits of an LLC over a Corporation is the fact that the LLC doesn’t pay income taxes. Single-member LLCs pay taxes as though they operate as a sole proprietorship. Multi-member LLCs are taxed as a partnership.3 min read
The benefits of LLC vs. Corporation could be surprising to some business owners.
One of the main benefits of an LLC over a Corporation is the fact that the LLC doesn’t pay income taxes. Single-member LLCs pay taxes as though they operate as a sole proprietorship. Multi-member LLCs are taxed as a partnership. However, if the multi-member LLC wants, it can be taxed as a corporation — either an S Corp or C Corp.
Both LLCs and Corporations are formed by filing documentation with the Secretary of State’s office; furthermore, both business structures offer limited liability protection for their owners. While there are some similarities between the LLC and Corporation, there are also many differences in the way in which each business is managed and taxed.
Advantages of an LLC
There are many advantages of operating an LLC, including the following:
- Limited liability protection
- No limit on the number of owners
- Pass-through taxation
- Flexible management options
- Distribution of profits can be determined by members
- Less formalities than a corporation
- No annual meeting requirement
The LLC owners enjoy limited liability, which means that they cannot be held personally liable for the debts of the business. Furthermore, there is no limit to the number of people and businesses that can own an LLC. However, the S Corp has a maximum of 100 shareholders who can own the business.
Similar to the S Corp and sole proprietorship, the LLC operates as a pass-through tax entity. All profits and losses of the business are reported on the owners’ personal tax returns. LLCs enjoy flexibility in terms of the management structure. The owners can choose to manage the business on their own (member-managed LLC) or hire a third party to be the manager of the LLC (manager-managed LLC). The members can even choose to give themselves job titles similar to a corporation if they choose.
Each member owns a percentage of the LLC, but the profits can be distributed in any way the members agreed upon. Therefore, someone who owns 52 percent of the company might only receive 30 percent of the profits. Furthermore, the members could choose to equally distribute profits even though the membership interest isn’t equal.
The LLC has much less formality than a corporation. LLCs need not hold annual meetings either; while the corporation isn’t only required to hold annual (and periodic) meetings, but must also keep meeting minutes.
Advantages of a Corporation
While there are many advantages to an LLC over a Corporation, there are some advantages to operating as a Corporation over an LLC, and these include:
- Ability to attract investors and increase capital
- Corporate income splitting
- Savings on self-employment axes
- Ease of the transfer of ownership
Since corporations can offer stock to the public and investors, it can increase capital significantly by doing so. Owners can also hold different types of stock interests — preferred and common stock — which allows for different levels of dividends. Corporate income splitting can also help lower tax liability.
Similar to an LLC, the S Corp operates as a pass-through tax entity. However, the C Corp does incur double taxation. This means that the C Corp must pay corporate income tax and then any dividends paid to the shareholders must be reported on their personal tax returns.
The S Corp can also provide savings on self-employment, Social Security, or Medicare tax by allowing its shareholders to offset any non-business income with losses incurred from the business. However, the C Corp doesn’t provide such benefit.
Moreover, any S Corp shareholders who are also employees will need to earn a reasonable compensation, and therefore, can reduce their self-employment taxes for the compensation provided to them. But the compensation is still subject to federal income taxes, Social Security, and Medicare taxes. C Corps, unlike LLCs, can retain and accumulate their earnings to an extent every year.
Another benefit of both the S and C Corp is the fact that they can freely transfer stock ownership among shareholders. Therefore, transferring stock will transfer ownership. If this happens in an LLC, then the business could risk being terminated as it is much more difficult to transfer membership interest in an LLC.
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