LLC Corporation Difference: Everything You Need to Know
The LLC corporation difference primarily lies in taxation. LLCs do not pay business income taxes, and members only pay taxes on their personal returns.4 min read
2. Core Differences
3. Corporate Taxation
4. S Corp Features
The LLC corporation difference primarily lies in taxation. For instance, corporations face double taxation, where the business itself must pay business income taxes, and shareholders must pay separate taxes on their personal tax returns. On the other hand, LLCs do not pay business income taxes, and members only pay taxes on their personal returns.
All business entities must register as a certain business type in the state where they will conduct business. If you choose to incorporate a business, you move from a sole proprietorship (or general partnership) to a business that has an incorporation designation.
In essence, a company becomes a legal business entity that’s separate from the individuals. States recognize business entities formed as:
- Sole proprietorships
Corporate Filing Process
The corporation is created through the filing of an incorporation document in the state where the business entity is created, and each member retains a certain amount shares. An LLC affords members with certain liability protections and combines the structure of a corporation with a partnership or sole proprietorship. Both entities register with the states, but LLCs do not incorporate.
The differences between a corporation and LLC can get complicated, but the details can be a deciding factor if you are choosing between a corporate or LLC entity.
- Note: You should seek the advice of a lawyer or accountant for more information, but you should know that not every lawyer or accountant is fully aware of current LLC laws.
In order to understand differences between an LLC and corporation, you should know the difference between a legal entity and a tax entity. A legal entity is an LLC or corporation, while a tax entity comprises a sole proprietorship/partnership or a C corp and S corp. New business owners tend to get such concepts confused, but the tax entity is simply what the IRS uses to tax businesses. On the other hand, the following state bodies recognize legal entities:
- Contractual partners
The corporation is a legal entity that’s given a tax designation in the form of an S corp or C corp. An LLC has can choose any tax identity. For instance, an LLC that’s viewed as a sole proprietorship or partnership can petition for a C-corp or S-corp tax classification. The LLC itself has no special tax designation and must use the tax classifications of other entities.
When it comes to corporations, they can be taxed in two ways:
- C corps
- S corps
Corporations are taxed by default as a C corp, and owners must submit Form 2553 to gain an S-corp tax designation. To obtain an S-corp classification, your business must meet the following conditions:
- The corporation must have 100 shareholders or less
- The corporation must be a domestic entity
- Other entities cannot own an S corp
- Non-residents and non-U.S. citizens cannot be shareholders in an S corp
- S corp may only have one stock class (no tiered stock allowed)
S Corp Features
The best feature of an S corp is that it bypasses double taxation associated with C corps. LLCs can be taxed as a C corp and S corp, but LLCs are taxed by default as a sole proprietorship or partnership. This means that an LLC also gets around double taxation by allowing members to pay personal taxes on their individual returns and do not have to pay business income taxes.
S corps and LLCs operate under pass-through taxation. Pass-through taxation occurs when losses and profits pass from the business to shareholders or owners. The owners/shareholders would then note such information on their individual tax returns.
An LLC may also allocate losses and profits among members without restriction. Moreover, money that’s borrowed by the business may enhance the tax basis (and decrease the taxes) of the owners, whereas an S corp does not. Contributing property to establish an LLC is non-taxable, even for minority-stake interest owners, whereas corporate regulations only permit tax-free privileges for contributors who control the company.
LLC owners also pay self-employment taxes on business income, while business owners who work for the LLC are designated as employees. Another advantage of an S corp is that it allows owners to include losses on personal tax returns in the form of deductions. S corp owners may also take out a portion of the profits without Social Security taxation. In addition, an S corp may yield additional savings on Medicare/Social Security taxes, and it permits owners to offset non-business income with business losses.
To learn more about an LLC corporation difference, submit your legal inquiry to our UpCounsel marketplace. UpCounsel’s lawyers will help you decide if an LLC or corporate entity is the right move for your business. Also, they will guide you in establishing an S-corp tax structure for your LLC, and they will lay out other tax options if an S-corp classification does not suit your business goals.