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Difference between Corporation and LLC

Date: 04/15/2016 | Category: Incorporation | Author: Jakub Vele

Most business owners often wonder which legal structure would be the most ideal for themselves and their businesses.  It is often challenging to understand the various types of business incorporation structures when selecting the most suitable one, especially for start-ups. This article will compare LLC versus C Corp business incorporation.

Corporation vs LLC

Incorporation is the first step to understanding the difference between LLC and C Corps. Incorporation is a legal process whereby a business entity/corporate is separated from its owners, and is identified as an entity on its own. Both partnership and sole proprietorship types of businesses can be incorporated.

Once a business has been incorporated it will fall into either a corporation (corp) or a limited liability company (LLC). These two types of businesses share certain similarities, such as the owner/owners are shielded from incurring any personal liability and increase in business credibility, among others. Here is a look at these two types of incorporation:

The Management of an LLC vs. CORP

For a business to become a corporation, it must have a defined management structure and also a board of directors. The board of directors is responsible for major decision making while the management is responsible for the day-to-day running of the business.  On the other hand, an LLC is flexible when it comes to the management structure, requiring only the managing directors of the business and its members.

The Taxation of an LLC and a C Corp

In matters concerning taxation, an LLC has the flexibility of being taxed as a C-corp, S-corp or Sole proprietor/partnership business. Therefore, an LLC can choose its own tax identity, which will benefit its members most.

The LLC has ‘pass-through’ taxation. This is whereby taxes are paid once at the individual level. Income and losses are also reported on a personal level. It is important to take note of the fact that while both the S-corp and LLC are subject to pass through taxation; the distribution of profits by the LLC among its members is subject to employment taxation. On the other hand, the dividends distributed by an S-corp are not subject to any taxation.

To qualify an S-Corp, the business must meet certain requirements that may inconvenience the business. These requirements may make a business identity as a C-corp, which is subjected to double taxation.

In contrast to LLCs, corps are taxed twice. Hence, they undergo “double taxation”. Whereby, the tax is paid by the entity itself, and then once the profits (in the form of dividends) are distributed to the company’s shareholders, they are taxed at an individual level.

Filing IRS forms for LLCs and C corps

LLCs file their profit distributions on Schedule K-1. The members of an LLC report their personal income on Form 1065 or 1040 Schedule C. If an LLC has an S Corp tax identity, Form 1120s is used by its shareholders to report income, while Schedule K-1, is used to file profit distributions. The salaries of its shareholders are also filed on Form W-2.

For C corps, the salaries of its shareholders are filed on Form W-2, income is placed on Form 1120 and Form 1099-DIV is used to file profit distribution.

Both LLCs and C corps have some benefits and disadvantages over each other. For instance, while the LLC is more suitable for a mid-sized business with a few members, the C corp. is suitable for midsized or large organizations with many shareholders. It is up to a business owner to choose a type of Incorporation that would best serve his/her needs, preferably after consulting a lawyer.