Both the LLC and corporation are legal entities that provide liability protection for their owners. While the corporation has been around longer, the limited liability company was created to offer the same level of protection. However, an LLC is designed specifically to cater toward the small business owner. It offers the same liability protection as a corporation but allows a much more simple operational structure with a lesser number of formalities. best LLC service
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.
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).