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house moving 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.

juegos 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.

home selling 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.

LLC v. Corporation – MANAGEMENT STRUCTURE

In addition, a limited liability company can have a very simple single layer of management (known as member-managed) or the management structure can be structured with a central governing body (manager managed).

When it comes to operations, the LLC is not required to meet the same level of formalities and paperwork as a corporation.

The corporation laws generally impose a set management structure for a corporation which requires a Board of Directors as a central body of management. In addition, in most states, there are required meetings and certain governance documents that must be entered into each year.

While it is still recommended that an LLC have some simple governance paperwork to document major business decisions, it is comforting to know that the laws do not require it for the legal entity to qualify as an LLC and get LLC benefits.

In deciding LLC or corporation, the LLC offers the same management structure imposed upon for a standard corporation but also allows for a much simpler one or a more complex one if needed to protect investors or the business.

Before you embark upon forming your business as a Subchapter S Corporation or an LLC, be sure to seek adequate counsel from professionals who are well versed with each entity in your states of interest. You can be published without charge. You can to republish this article in your website or blog. Please provide links Active.

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