Main differences between LLC and Corporations.

You’ve decided to create a company in the US, great! Now you have to choose what business entity would best suit your needs.

It’s a crucial decision to make. It’s very complex since it depends on many factors, including the medium and long-term goals you have set for your business.

You’ll need detailed information from a skilled professional, anyway, here we would love to outline the main features and differences between the most common business types in the US.

LLC (LIMITED LIABILITY COMPANY) and CORPORATIONS (S-CORP or C-CORP).

Both are limited companies with many differences though; let’s see a few examples.

Structure and flexibility.

C-Corps have a set corporate structure. They must have a Board of Directors handling the major decisions. They also have corporate officers who deal with daily business operations. Shareholders are considered the owners of the corporation but don’t participate in business decisions (except for the approval of the most important ones). Shareholders may be elected as directors or appointed as officers. LLCs have a leaner structure. Each member can act as a manager, and there is less bureaucracy to handle.

Taxation.

LLC’s taxation is “pass-through.” With this type of taxation, taxes are not paid at a corporate level, they are paid at the individual level. Profits are considered to be individual income, for each owner.  Profits and losses are not filed by the company; they are filed by each member individually. The same thing applies to S-Corps. C-Corps are taxed as separate entities, at the corporate level. In addition to that, when profits are distributed to shareholders as dividends, they are taxed a second time. It’s a double taxation. To recap: C-Corps pay taxes on their profits at the entity level first. And then owners pay taxes at the individual level.

S-Corps offers an advantage regarding losses. Owners can use them as deductions in their personal tax filing. With S-Corps it’s also possible to have savings on self-employment, medical care, social security taxes. Owners can compensate their income (originating from non-business activities) with losses arising from the business. This is not possible with C-Corps.  There are also combined forms of business entities. As an example: it’s possible to create an LLC choosing to be taxed as a C-Corp or an S-Corp (if specific requirements are met).

Ownership.

LLCs and C-Corps have no restrictions regarding the number of owners. S-Corps can have a maximum of 100 owners, and they cannot be “nonresidents aliens.”

Shareholders are the owners of a corporation. Members are the owners of an LLC.  The main difference is that an LLC can decide to distribute its ownership stake regardless of the capital contribution of each member. This will have to be outlined in an operating agreement. This also applies to C-Corps. S-Corps can have just one stock class structure, and dividends are distributed proportionally to shareholders, according to each one’s investment.

Legal issues.

Corporations have been around for centuries. They have developed a lot, and the laws governing corporations have gradually become uniform in all the States. LLCs are much younger. They have been recognized in the 1970s. States have similar LLC laws, but sometimes these laws differ from State to State. This situation will probably change, and LLC’s laws will gradually be harmonized too, but currently, it might be convenient to open an LLC in a State and not in another one.

After this brief overview, it’s evident how crucial is the decision. Complex assessments are necessary to make the best choice. Make sure to rely on expert professionals who will guide you through this delicate process. Our studies are at your disposal to erase your doubts. Get in touch!