The Advantages and Disadvantages of a Corporation Vs. LLC
When setting up a new business, choosing the right type of legal entity is one of the most important decisions that you will have to make. You have the option of going with a corporation or with a limited liability corporation. The corporation has some advantages, but it is also more formal than the limited liability corporation.
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Tax on Owner Earnings
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One of the advantages of the C corporation is that you can set it up so that the shareholders of the company do not have to pay taxes on money that is not distributed to them. With the LLC, this is not the case, as you have to pay taxes on the profit that you are entitled to regardless of whether the LLC distributed it to you. With the C corporation, the entity is taxed separately, so this does not have to carry over to your personal taxes.
Administration
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One of the key differences between these two types of entities is the amount of administration that must take place with each. If you have a C corporation, you will have to do many more administrative activities. For example, you will have to elect a board of directors and hold an annual shareholders meeting. You also have to file annual reports with the government. With the LLC, you can set up the management in any way that you want and you do not have to file any annual documents.
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Double Taxation
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One of the major disadvantages a going with a traditional C corporation is that you will have to deal with double taxation. The money that is earned from the corporation will be taxed once at the corporate level. Then the corporation can distribute profit to the shareholders of the company. At that point, the shareholders also have to pay taxes on the money that they have received from the corporation. With the LLC, all of the profits simply pass through to the owners of the business.
Self-Employment Tax
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One of the advantages of setting up a corporation is that you can get out of paying self-employment tax on some of your earnings. With the LLC, you have to pay Medicare and Social Security taxes on all of the money that you bring in. With the S corporation, you can pay yourself a reasonable wage and pay self employment tax only on that amount. You can then take the rest of the profit without paying these taxes on it.
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