Limited Liability Companies Compared to Corporations
Limited Liability Companies or LLCs Compared to Corporations
Corporations and LLCs are similar when it comes to not having to worry about unlimited liability when starting your business. When it comes to creating the LLC state laws give some advantages to LLCs over corporations.
There are fewer formalities in an LLC compared to a corporation. In a corporation, the board of directors and shareholders must hold regular meetings. Annual reports must be filed with the state, and keep written corporate minutes. This is not the case in an LLC. Members and managers do not have to hold regular meetings. A creditor may be able to hold shareholders liable if there are improper procedures in place.
You can avoid double taxation in an LLC compared to a corporation. For tax purposes, an LLC can be treated as a corporation such as a C corporation or an S corporation. But S corporations are only allowed one class of ownership. Profits and losses are allocated according to the percentage of ownership. In an LLC among members, you can make special allocations of profits and losses. When it comes to property contributions for a corporation the Internal Revenue Code allows it to be tax-free for only the contributors who have control over the business.
In a limited liability company, there are no ownership restrictions. An LLC can have as many members as it chooses. An S corporation is limited to one hundred. The owners of a limited liability company can be foreign, or other corporations. However, the owners of a corporation cannot be. When it comes to accounting methods there is a difference between corporations and LLCs. C corporations are only allowed to use the accrual method of accounting. LLCs can use the cash method. Shareholders of a C corporation are not allowed to deduct operating losses from their regular income. This is allowed for members of an LLC and S corporation.
LLCs can use the cash method. Shareholders of a C corporation are not allowed to deduct operating losses from their regular income. This is allowed for members of an LLC and S corporation. Members of an LLC can place their interests in a living trust. Doing this in an S corporation can raise issues with the status. But there are disadvantages of an LLC compared to a corporation as well.
Disadvantages of an LLC
The disadvantage when it comes to tax purposes is that all earned income is subject to self-employment tax. In an S corporation, some money can be taken out as salary and as dividends. The profits are automatically included in a member’s income unless they elect the LLC to be taxed as a corporation. Shareholders in a C corporation aren’t always taxed on the profits. That is because they do not have to automatically distribute profits as dividends.
Shareholders of a corporation are not liable for payroll taxes. The only way is if they are directors or officers. If payroll taxes aren’t paid by the company then the owners of the LLC would be personally liable. Even if a corporation and LLC generated the same revenue, LLCs still have to pay higher taxes and fees. LLC employees who receive fringe benefits such as medical insurance and parking must treat these as taxable income. C corporation employees do not.