LLC a Corporation: Everything You Need to Know
While there are similarities between an LLC and a corporation, there are also several key differences between the two.3 min read
2. LLC vs. Corporation: Tax Differences
Simply put, there is no such thing as a limited liability corporation. Instead, an LLC is registered whereas the corporation is incorporated. LLCs are pass-through tax businesses; this means that the profits of the LLC pass through to the owners of the LLC (also referred to as members). Thereafter, the profits are included on those members’ personal tax income returns. Corporations, however, are considered separate and distinct legal entities from its owners (also referred to as shareholders).
LLC vs. Corporation: Structural Differences
There are many differences between the LLC and corporation. While one type of business structure isn’t better than the other, it all depends on your own business objectives and goals. For example, Google operates as a corporation but YouTube operates as an LLC.
However, when YouTube was established, it was actually formed as a corporation in the State of Delaware back in 2005. One year later, however, it converted into an LLC. The true reason for this is unknown, but it was likely a strategic move in which the members of the company thought it would be better suited for them to own and operate an LLC.
In fact, YouTube LLC has very few members, who are unknown to the general public. Google was incorporated in 1998, and has millions of shareholders. Therefore, Google would not be well suited as an LLC. But Google does so well as a corporation because the company chose to go public on the NASDAQ (2004) and offer its shares to the public to raise capital. That is why Google is one of the richest companies worldwide, while that number continues to grow.
However, using these two examples, it is safe to say that, regardless of whether you choose to operate as an LLC or corporation, your business can still be successful. It just depends on the avenue in which you choose to go down for your business in determining which type of business structure to operate.
LLC vs. Corporation: Tax Differences
An LLC and Corporation are taxed differently. What’s more, the S Corp is taxed differently from the C Corp. C Corps face double taxation—once at the corporate rate and again at the personal level if distributions were paid to the shareholders. S Corps and LLCs, however, do not face double taxation. In fact, these two business types have similar tax structures.
Let’s take an example of a business being taxed as a corporation. Now let’s assume the profit for that corporation in one year is $500,000. That profit could be taxed at the corporate tax rate of 35 percent. Now let’s assume that the business is taxed as an LLC (single member). The single owner will need to report that $500,000 in profit on his or her personal tax return.
However, let’s assume it’s a multi-member LLC being taxed as a partnership. If there are two members who have an equal share of ownership in the LLC, then each member will be required to report $250,000 on their own personal tax return. Be mindful that the individual tax rates can be even higher than the corporate level tax rates. Therefore, you should consider your options before forming your business.
With that said, even if you form an LLC, you can elect to be taxed in one of the following ways:
- A single-member LLC can elect to be taxed as an S Corporation or C Corporation
- A single-member LLC can elect to be taxed as a sole proprietorship
- A multi-member LLC can elect to be taxed as a partnership
- A multi-member LLC can elect to be taxed as an S Corporation or C Corporation
The reason as to why an LLC can elect to be taxed as a different business entity is because the IRS views the LLC as a disregarded entity. Owners of an LLC are also required to pay self-employment taxes on all profits of the business, whereas shareholders in a corporation are considered employees and only pay taxes on employment income.
If you need help determining whether to form an LLC or corporation, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.