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Corporations compared to LLCs
Limited liability companies, or LLCs, combine the personal liability protection
of a corporation with the tax benefits and simplicity of a partnership. However,
there are still other important differences. The following discusses the main
advantages and disadvantages of corporations against LLCs.
Advantages:
Profits are not subject to social security and Medicare taxes.
Salaries and profits of an LLC are subject to self-employment taxes, currently
equal to a combined 15.3%. With a corporation, only salaries, and not profits,
are subject to such taxes. This advantage is most significant for
stockholder-owners who take a salary of less than $72,600.
For example, if an owner-employee of an LLC earns $20,000 in salary and is
distributed $40,000 of the LLC's profits, a 15.3% tax would have to be paid on
$60,000. For an S-corporation, social security and Medicare taxes would only
have to be paid on the $20,000 salary. This saves the stockholder-employee over
$6,000 per year. Please note, however, that the IRS frowns upon employee-owners
of an S- corporation not paying themselves salary and simply distributing the
profits. In situations where the IRS feels that shareholders are taking too
little in salary, the IRS will recharacterize all or part of the profits as
salary.
Greater tax flexibility. A C-corporation does not have to
immediately distribute its profits to its shareholders as a dividend. This means
that shareholders in a C-corporation are not always taxed on the corporation's
profits. Because an LLC is not subject to double-taxation, the profits of the
LLC are automatically included in a member's income.
Greater variety of, and fewer taxes on, fringe benefits.
Corporations can offer a greater variety of fringe benefit plans than any other
type of business entity. Various retirement, stock option and employee stock
purchase plans are available only for corporations. In addition, sole
proprietors and partners who receive fringe benefits, such as group-term life
insurance, medical reimbursement plans, medical insurance premiums and parking,
must pay taxes on these benefits. The same is true for employees who own more
than 2% of an S-corporation. However, stockholder-employees of a C-corporation
who receive fringe benefits do not have to pay taxes on these benefits.
Disadvantages
More corporate formalities. Corporations must holding regular
meetings of the board of directors and shareholders and keep written corporate
minutes. Members and managers of an LLC need not hold regular meetings, which
reduces complications and paperwork.
S-corporations have ownership restrictions. S-corporations cannot
have more than 75 stockholders, and each stockholder must be a natural person
who is a resident or citizen of the United States. There are no restrictions on
the number or type of owners in an LLC. In addition, it is difficult to place
shares of an S-corporation into a living trust.
Shareholders of C-corporations cannot deduct operating losses.
Members who are active participants in the business of an LLC are able to deduct
operating losses of the LLC against the member's regular income to the extent
permitted by law. Shareholders of an S-corporation are also able to deduct
operating losses, but not shareholders of a C-corporation.
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