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LLC or Corporation: What’s Better?

By: SmallBizClub


Advice from the Experts: What You Need to Know to Found an LLC

Many entrepreneurs just starting a business or considering changing their current business’ structure come to us wondering:

What’s the difference between an LLC and Corporation? Which one is a better option for me?

It’s an understandable question, and an important decision to make for the success of your business.

This post will explain what you need to know to decide between the two.

A Legal vs. Pass-through Entity

Just like a sole proprietorship or partnership, an LLC is considered a pass-through entity. A pass-through entity:

  • Doesn’t pay income tax for profits
  • Profits and losses go to the business owners directly
  • These are then claimed on their personal tax returns

An LLC usually has a centralized management structure. Any member of the LLC can manage the business.

As a separate legal industry, a corporation, in contrast, must:

  • Submit a tax return
  • Pay income taxes on profits

Corporations have a Board of Directors making business decisions and corporate employees who take care of daily operations.

In some cases, corporations undergo “double taxation,”—the business is taxed for profits, and when the owners take money out of the company, those funds are taxed again on personal tax returns.

Flexibility in Filing

Both LLCs and Corporations have the option to change the way they’re treated for taxation. A corporation can be treated as a pass-through tax entity by using an “S corporation tax treatment.”

Corporations are subject to double taxation, while corporations and LLCs are exempt. However Corporations also have some flexibility compared to pass-through entities.

For example, an LLC taxed as a pass-through entity needs to pay taxes on their share of the profits, regardless whether or not the money stays in the business.

Corporations are only taxed the amount of profit they receive in dividends. Your tax advisor can help you get into a lower income bracket by leaving some of your earnings as corporate profits.

Employee Benefits

LLC members and corporation shareholders will need to pay taxes on some employee benefits, including health benefits, life insurance benefits, and employer contributions to HSAs or FSAs.

Corporation shareholders don’t need to pay these taxes, or have access to certain stock options, employee stock purchase plans and retirement plans.

Social Security and Medicare Taxes

Members of an LLC are not considered to be employees for tax purposes, making their earnings exempt from social security and Medicare taxes. If an LLC member actually works for the business, they will need to pay self-employment taxes. However, they can deduct any operating losses from the business on their personal tax returns.

For a corporation, salary earnings must be taxed for both social security and Medicare. Profit distribution is exempt, but it’s not possible to deduct losses for either C or S corporations.

There are pros and cons to making your business either an LLC or corporation. Consider your company structure and specific needs before deciding which is right for you.

Troy MartinAuthor: Troy Martin is a shareholder of the firm in the Logan office of Cook Martin Poulson, P.C. Troy works as a facilitator for family-owned businesses through succession and strategic planning processes.

Facebook: http://www.facebook.com/cookmartinpoulsonpc

Published: May 25, 2016

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