If you are planning to do business in America, you need to clearly understand some of the legal subtleties. for example, know what the differences are between LLC and Corporation. It is also important to understand the merits and demerits of each type of company for entrepreneurs who decide to start a business in the United States.
Quick comparison: LLC vs C-Corporation
By default, an LLC is a “pass-through” taxable entity, which means that income is not taxed at the company level (however, a Multi-Member LLC is still required to receive a separate tax return). Gains or losses reported on this Tax Return are “passed on” to individual members and reported on their individual tax returns.
C-Corporation is a separately taxable entity and pays income tax prior to distribution of dividends to shareholders. If and when corporate income is distributed to shareholders in the form of dividends, the corporation does not receive a reasonable deduction for business expenses and the dividend income is taxed as ordinary income to shareholders.
These types of companies differ in their structure:
LLCs are less rigid in structure than corporations, so you have more flexibility in adapting LLCs to your unique business. The Operating Agreement LLC can be structured in an unlimited number of ways.
A corporation is a type of company with officers and directors - officers (at least one). On the other hand, an LLC can be "member-driven" and operate less formally. For small start-up companies, less formalities mean you can focus on making money rather than administrative work.
Quick comparison: LLC vs. S-Corporation
While the special tax status of the S-Corporation eliminates double taxation, it lacks the flexibility of an LLC in distributing income to owners. An LLC can offer multiple classes of interests for its members, and an S-Corporation can only have one class of shares.
Any number of individuals or legal entities can own an interest in an LLC. In addition, LLCs can have subsidiaries without restriction. The ownership interest in S-Corporation is limited to no more than 100 shareholders. In addition, S-Corporations cannot be owned by C-corporations, other S-corporations, many trusts, LLCs, partners, or non-resident foreigners.
One of the advantages of the S-Corporation is how self-employment taxes are calculated. S-Corporation officers hired by the company must receive a salary, and their own tax is calculated based on that salary (this is true except for S-Corporations based in New York). LLC owners, on the other hand, pay self-employment taxes based on all distributions they receive.
Quick comparison: C-Corporation vs. S-Corporation
All corporations start out as C-Corporations and are required to pay income tax on taxable income. C-Corporation becomes S-Corporation by filling out and filing Federal Form 2553 with the IRS.
The net profit or loss of the S-Corporation is “passed on” to shareholders and included in their personal tax returns. Since income is not taxed at the corporate level, there is no double taxation as with corporations such as "C-Corporation".
S-Corporations are limited to no more than 100 shareholders and cannot be owned by C-corporations, other S-corporations, many trusts, LLCs, partners, or non-resident foreigners.
