A limited liability company is a type of business entity that
combines the personal liability protection of a corporation with the tax benefits
and simplicity of a partnership. The following section details the main advantages
and disadvantages of corporations versus LLCs.
Advantages of a corporation versus a limited liability company (LLC)
Corporation profits are not subject to Social Security and Medicare taxes
Like a sole proprietorship or a partnership, the salaries and profits of an LLC
are subject to self-employment taxes, currently equal to a combined 13.3%, unless the LLC opts to be taxed as a corporation. With
a corporation, only salaries (not profits) are subject to such taxes.
Corporations garner greater acceptance
Since limited liability companies are still relatively new, not everyone is familiar
with them. Although they continue to grow in popularity, still, in some cases, banks or vendors may be reluctant to extend credit to
limited liability companies. Some states restrict the type of business an LLC may
Corporations can offer a greater variety of fringe benefits with fewer
Corporations offer a greater variety of fringe benefit plans than any other business
entity. Various retirement, stock option and employee stock purchase plans are available
only for corporations. Plus, sole proprietors, partners and employees owning more
than 2% of an S corporation must pay taxes on fringe benefits (such as group-term
life insurance, medical reimbursement plans, medical insurance premiums and parking).
Shareholder-employees of a C corporation do not have to pay taxes on these benefits.
Corporations lower taxes through income shifting
Although C corporations are subject to double taxation, a C corporation can use income shifting to take advantage
of lower income tax brackets.
To illustrate, let's take an example of a company that earns $100,000. With a
sole proprietorship, a business owner who is married and filing jointly would be
in the 25% income tax bracket. With a corporation, assume that the business owner
takes $50,000 in salary and leaves $50,000 in the corporation as corporate profit.
The federal corporate tax rate is 15% on the first $50,000. Furthermore, the business
owner is now in the 15% tax bracket for his or her personal income tax. This can
reduce your overall tax liability by over $8,000.
Advantages of a limited liability company (LLC) versus a corporation
LLCs have fewer corporate formalities
Corporations must hold regular meetings of the board of directors and shareholders
and keep written corporate minutes. Members and managers of an LLC need not hold
regular meetings, which reduces complications and paperwork.
LLCs have no ownership restrictions
S corporations cannot have more than 100 shareholders. Each shareholder must be
an individual who is a U.S. resident or citizen. Also, it is difficult to place
shares of an S corporation into a living trust. These restrictions do not apply
to LLCs (or C corporations).
LLCs have the ability to deduct operating losses
Members who are active participants in an LLC's business can deduct operating
losses against their regular income to the extent permitted by law. While S corporation
shareholders can also deduct operating losses, C corporation shareholders cannot.
LLCs have tax flexibility
By default, LLCs are treated as a "pass-through" entity for tax purposes,
much like a sole proprietorship or partnership. However, an LLC can also elect to
be treated like a corporation for tax purposes, whether as a C corporation or an
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