LLC - Corporation - Which is the right Choice for you?
Choosing the right business entity, LLC vs. Corporation, depends on what business characteristics you need for your company to succeed. Important factors to consider include: which tax structure is right for your business, will you be raising capital, how many shareholders will you have, where do your investors reside, and will you have more than one class of stock? There is much to consider. The chart below will help you decide. .
CHARACTERISTICS |
LLC |
C-CORPORATION |
S-CORPORATION |
| Limited Liability of Owners |
Personal Liability Protection |
Personal Liability Protection |
Personal Liability Protection |
| Continuity of Life |
Determined by State of Formation |
Perpetual |
Perpetual |
| Entity Federal Income Tax |
Optional – can either be taxed solely at the member level or at both the entity level and member level |
Taxed at both the entity level and the shareholder level |
No entity level taxation – profit and loss is passed through to the shareholder |
| Ease of transferability of ownership |
As outlined in the Operating Agreement |
Shares of stock are easily sold but restrictions may exist in Shareholder’s Agreement |
Stocks can be sold but must meet IRS restrictions on who can own stock. May be restrictions in Shareholder’s Agreement |
| Favorable Federal Income Tax deductions for health insurance and other fringe benefits |
Depends on chosen tax treatment |
Yes |
Better than Proprietorship but not as favorable as C-Coporation
|
| Can limit personal liability of officers and directors for breach of fiduciary duties |
Yes |
Yes |
Yes |
| Can issue more than one class of stock / ownership |
Yes |
Yes |
No |
| Limitation on number or qualifications of shareholders |
No |
No |
Yes – maximum of 75 shareholders and must be a citizen of the USA |
| Fiscal year accounting may be available |
No |
Yes |
No |
| Self employment tax on dividend distributions |
Depends on chosen tax treatment and amount of salaries to Members |
No |
No |
| Member flexibility for employment taxes |
Yes. Members can elect to treat themselves as employees or self employed |
No. Corporations must have employees |
No. Corporations must have employees |
| Flexibility of allocating income and tax deductions among members |
Yes. Members can make special allocations of income and tax deductions |
No |
No |
| All Owners can have management ability |
Yes. LLC can either be member managed or manager managed |
Shareholders can also serve as Directors and Officers |
Shareholders can also serve as Directors and Officers |
| Operational Requirements |
Can be very simple operationally, but operating agreement, Managers, Annual Meetings recommended. Annual Report of Managers and/or Members required |
Board of Directors must appoint Officers who manage the day-to-day activities of the corporation. Must have Annual Meetings and annual reporting required |
Board of Directors must appoint Officers who manage the day-to-day activities of the corporation. Must have Annual Meetings and annual reporting required |
| Management |
Members outline management in their operating agreement |
Shareholders must elect a Board of Directors who appoint Officers who manage the day-to-day activities of the corporation |
Shareholders must elect a Board of Directors who appoint Officers who manage the day-to-day activities of the corporation |
| Raising Capital |
Membership Interests may be sold to raise capital |
Shares of stock may be sold to raise capital |
Shares of stock may be sold to raise capital |
