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Resource Author Francisco Rodriguez Higueras
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For years smaller businesses used the structure of an S-corporation to benefit from "pass-through taxation" while avoiding the double taxation imposed on a C Corporation. Then in 1988 the IRS decided to get in sync with several states which had passed legislation allowing the formation of a legal entity called a "Limited Liability Corporation" or LLC.

It wasn't long until other states began to pass their own versions of this legal entity. Today all fifty states offer the LLC as a choice of legal business entity formation alongside the traditional C Corporation, Subchapter S Corporation, General Partnership, Limited Partnership and possibly others.

LLC v. Corporation – TAX MATTERS

The limited liability company offers more tax choices than a corporation. Owners of an LLC can elect for profits to be taxed pursuant to a pass through structure (single layer of taxation) or pursuant to a C corporation (double taxation) or S corporation structure (single taxation but with many requirements and ongoing compliance requirements).

The corporation only has the choice of C corporation or S corporation taxation. Small business owners many times prefer the LLC pass through taxation because it allows them to avoid double taxation of profits and in many cases be able to take business losses to reduce taxes from other income WITHOUT having to worry about meeting a laundry list of S corporation requirements.

While the S corporation structure is available to both types of entities, it only allows a certain # of owners, all owners must be persons (so no entities) and US or permanent residents of the United States. There are other requirements as well so check with your accountant for the specific details.

As a business evolves, things change and with an S corporation tax status, you always need to be on top of the latest S corporation requirements. The failure to meet a requirement, even if accidental, can result in disastrous tax liability and penalties.

The S corporation can have some tax benefits over the standard pass through when it comes to self employment. In these cases, you have the option of S corporation taxation with either the LLC or corporation.

LLC v. Corporation – OWNERSHIP STRUCTURE COMPARISON

An LLC also gives an LLC business much more flexibility when it comes to ownership structure. The LLC laws allow for the company to tailor what each owner gets in terms of voting control and distributions.

The corporation has a set ownership structure. Ownership is defined by a share of stock and each share of stock provides a set right when it comes to voting and profits rights. The LLC can choose this standard structure but does have the flexibility to customize it if needed without having to create multiple classes of ownership.

Accordingly, an LLC is more attractive when it comes to bringing in investment capital or services partners because it offers more options to address specific business situations.

Many times I heard business owners suggest that they sign guarantees but "know" they're not enforced. Wrong. Guarantees are enforced all the time. If the company fails, the holder of the guarantee will come after the business owner.

Years ago another lawyer told me that 10 feet of water over his client's head was the same as 1,000 feet. Many owners take comfort in this theory when considering a guarantee. But, remember, even if you can't pay it, a judgment will prevent you from borrowing money to buy a home or car.

You probably won't get out of guarantees for banks. But don't accept them as "standard" in leases and supplier contracts. Often, you can provide a larger deposit or play one supplier off against another to avoid the guarantee.

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