C-CORPORATION vs S-CORPORATION vs LLC - Which entity to choose?

Which entity to choose?

It is all confusing. Which entity to choose? LLC or Corporation? Which tax status? Sub-S? LLC with an 8832? How do you document percent ownership among partners? Who has decision-making power, voting rights? Who gets what in dissolution? What about taxes? It is critical to have a business lawyer advise you specifically on each topic, after taking into account your exact legal and tax position.

What should you do first?  Start a business relationship with an experienced business lawyer.  If you are considering starting a business, your first decision should be to start a relationship with a knowledgeable business formation and incorporation attorney.  Law Offices of Inna Fershteyn will be happy to assist you.  But before we begin, lets first pick the entity we are going to use to start our business.

Law Offices of Inna Fershteyn has put together a chart to help our clients choose what entity may be more appropriate for them.

DIFFERENCE BETWEEN CORPORATION & LLC

There are many important differences between the corporation and LLC.  First, the entities are taxed differently. An LLC is a pass-through tax entity. This means that the income to the entity is not taxed at the entity level; however, the entity does complete a tax return. The income or loss as shown on this return is "passed through" the business entity to the individual shareholders or interest holders, and is reported on their individual tax returns.    

With a standard corporation, the corporation is a separately taxable entity. Corporations are treated as a separate legal taxable entity for income tax purposes. Therefore, corporations pay tax on their earnings. If corporate earnings are distributed to shareholders in the form of dividends, the corporation does not receive the reasonable business expense deduction, and dividend income is taxed as regular income to the shareholders.

Second, LLC's are less rigid in their structure than corporations, so you have more flexibility in adapting the LLC to your unique business.  The Operating Agreement of a LLC can be structured in a limitless amount of ways.  Law Offices of Inna Fershteyn will be happy to assist you with negotiating and drafting an LLC Operating Agreement for your business.

Third difference is corporate formalities:  A corporation is a formal entity where officers and directors are required.  An LLC, on the other hand, can be "member managed" and run in a less formal way.  For small, start-up businesses, less formality means you can focus on making money rather than administrative work.

What is a difference between an S-Corporation and a C-Corporation?

All corporations start as a "C" corporations and are required to pay income tax on taxable income generated by the corporation. A C corporation becomes a S corporation by completing and filing federal form 2553 with the IRS. An S corporation's net income or loss is "passed-through" to the shareholders and are included in their personal tax returns. Because income is NOT taxed at the corporate level, there is no double taxation as with C corporations. Subchapter S corporations, as they are also called, are restricted to having no more than 100 shareholders.

What is a difference between an S-Corporation and an LLC?

While the S corporation's special tax status eliminates double taxation, it lacks the flexibility of an LLC in allocating income to the owners. An LLC may offer several classes of membership interests while an ‘S’ corporation may only have one class of stock.

Any number of individuals or entities may own interests in an LLC. However, ownership interest in an ‘S’ corporation is limited to no more than 100 shareholders. Also, ‘S’ corporations cannot be owned by ‘C’ corporations, other S corporations, many trusts, LLCs, partnerships, or nonresident aliens. Also, LLCs are allowed to have subsidiaries without restriction.

Comparison Chart of C-Corporation, S-Corporation and LLC:

DESCRIPTION C-CORPORATION S-CORPORATION LLC (Limited Liability Company)
 Type of Ownership Stock, there maybe different classes.  Stock, but only one class. But can have voting and non-voting. Membership Interests. There may be different classes of membership.
 Eligible Owners No restrictions. 100 shareholder limit. No non-individual and no non-resident alien shareholders.  No restrictions.
 Management Managed by director(s) and officer(s).  Directors and officers. Managed by all members or designated manager(s).
 Allocations of Ownership No. Dividends must be paid based upon stock ownership.  Income, gain, and loss pass through to the shareholders based on percentage of shares owned.  Permitted if the allocations have substantial economic effect.
 Transfer of Ownership Shares freely transferred. Shares can be transferred only to eligible S corporation shareholders. There maybe restrictions under certain state laws.
 Liabilities and Basis Not increased. Not increased. Increased.
Tax Upon Sale Potential double taxation. Corporation is taxed on sale of assets, shareholders taxed on dividends or capital gains tax. Single tax at member level. Potential built-in gains tax if corp. had appreciated property at time of S corp. election. Single tax at member level upon sale of appreciated assets. Generally, no tax on distribution of appreciated assets.
Fringe Benefits Shareholders - Employees are eligible for most. 2% shareholders are ineligible for certain ones. Members are ineligible for certain ones.
Pass Through of Losses Losses not passed through. Losses passed through to shareholders, subject to certain restrictions. Losses passed through to members, subject to certain restrictions.
Fiscal Year May use any fiscal year. Personal Service Corps must use a calendar year, subject to certain exceptions. Must use calendar year, subject to certain exceptions. Must use tax year of members having a majority interest in the LLC, or the tax year of all principal member if there is no majority member.
Liability of Owner There is limited liability for shareholders, officers, and directors. There is limited liability for shareholders, officers, and directors. There is limited liability for owner(s) and manager(s).
Duration Indefinitely. Indefinitely. Dissolves at the time specified in the Operating Agreement or upon the loss of a member unless other members agree to continue.

 

If you would like to discuss your estate planning needs, please contact an experienced estate planning attorney at the Law Offices of Inna Fershteyn by calling (718) 333-2394 or contact us via email today.