In deciding between LLC vs Corporation, LLC vs S Corp, LLC vs Inc. you have to be fully aware of the way each business entity is organized, taxed, run and controlled by legislation. With these various forms of enterprise, each has advantages and disadvantages. Choosing an inappropriate business format can have serious consequences.
LLC vs Corporation
Firstly, LLC vs Corporation. An LLC is known as a “pass-through” business, where profits and losses generated by the company are directly apportioned between the members (owners). The company’s income is treated as the personal income of the members in the proportions set out in the Operating Agreement, and taxed accordingly.
With a Corporation, profits and losses are assigned to the company and it is the corporation which is taxed, not the individual owners. Indeed, taxation is one of the crucial factors when considering between LLC vs Corporation, LLC vs S Corp, LLC vs Inc.
One common characteristic of LLCs and corporations is the limited liability of members or shareholders in respect of company debts and lawsuits against the business.
LLC vs S Corp
In considering LLC vs Corporation, LLC vs S Corp, LLC vs Inc. you should not overlook the special tax treatment of S corporations.
S corporations are formed by an LLC electing to be taxed under Subchapter S of Chapter 1 of the Internal Revenue code. This means that S Corporations do not pay federal income tax; rather the profits or losses are apportioned between the shareholders or members to be taxed in the same way as a partnership.
Therefore, S Corporations provide many of the partnership-type advantages of individual taxation, with the limited liability of LLCs.
There are several requirements a company must meet before it can elect to be taxed under Subchapter S. Also, the various laws and procedures setting out the handling of S corporations can be rather complex, and can differ from state to state. At the end of the day, professional advice from an attorney or accountant should always be strongly considered before making any decisions.
LLC vs Inc.
We now move on to the Inc. part of LLC vs Corporation, LLC vs S Corp, LLC vs Inc. Comparison of LLC and Inc. shows that the main features of the Inc. are that the shareholders are owners of the company. Also, there is no choice of taxation, as there is with an LLC. There is double taxation in the case of an Inc, but only single taxation with the LLC. Generally, the provisions for the formation and running of an inc. are more onerous than an Inc.
Therefore, an LLC is only going to be suitable if it is appropriate for the profits and losses of the business enterprise to be assigned between the members of the LLC. If not, then an incorporated company must be considered where the profits and losses belong to the company.
Generally, then, the format of incorporated companies is more suitable for larger business entities, where the extra regulations and the taxation situation should be more appropriate.
Using these guidelines, it should be straight-forward to making the LLC vs Corporation, LLC vs S Corp, LLC vs Inc. decision.
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