Updated: Aug 11, 2022
There are many differences between business entities. Limited Liability Corporation (LLC), S-Corps and C-Corps are the most common for individuals’ file. There are benefits to each entity and drawbacks as well. For starters, those who have ownership in an LLC are called members and those who are in a corporation are called shareholders.
A Limited Liability Corporation implies that there is less liability of the owners/members. They would not be personally responsible for any debts the corporation may incur or any liability from lawsuits. Because it is a legal entity, it shares that trait with other corporations such as S-Corp or C-Corp.
In the United States, many states will not allow creditors to collect member’s dividends. Whereas creditors can go after shareholder’s corporation dividends.
LLC’s have better advantages regarding tax classifications than other corporations. LLC’s can choose the form of tax entity it wants to claim for the IRS. It can be taxed as a sole proprietorship or partnership, meaning the individual can have pass through taxation. This is when there is only one member, any profits (and Losses) are passed through to the individuals’ personal tax return and no additional tax fillings needed. The single member can also decide to file business tax returns instead. If there is more than one member then the LLC must file a business tax return as if it were a C-Corp or C-Corp. Corporation must file a business tax return and does not have the pass-through option.
The existence of a Limited Liability Corporation usually has a life span that is shorter than a S-Corp or C-Corp. Corporation can live past any single shareholders, the survival of the Corporation can be perpetual. This is because of the multiple shareholders. If an LLC has a single member who owns and manages the business, then the LLC will cease to exist after the death of the member.
Corporation are held to a higher standard regarding regulations. The oversight with LLC’s is a lot less than that of Corporations. S- Corps and C-Corps are required to adopt by-laws, issue stock, and hold annual director and shareholder meetings. These meetings require minutes to be take and kept within corporate records. These requirements are suggested for LLC’s to follow but not enforced. With fewer restrictions, it is easier to add new members or sell interest in the LLC to other people. LLC’s are not required to file documents with the Security and Exchange Commission if the members take an active role in the management.
LLC’s and C-Corps have the potential for as many members or shareholder that they want. S-Corps are not permitted to have more than 100 shareholders. S-Corp cannot have non-US citizens as shareholders while LLC’s and C-Corps can have non-US citizens as members or shareholders. LLC members must keep clear records and dealing which show the separation of personal affairs and the business. If this “corporate veil” is pierced then the member can risk the loss of tax and liability protections provided from an LLC.
If you are thinking of starting a business and unsure of which business entity will be best suited for your business, reach out to Wilkerson Law Group today. We have experienced attorneys who specialize in business law.