S Corporation vs C Corporation vs LLC?
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Still not sure whether to choose S Corporation vs C Corporation vs LLC? Check Out these quick reference guides.
Compare C Corporation vs. S Corporation?
A C Corporation and an S Corporation are very similar in respect to liability protection. The main difference is in how you are taxed. A C Corp has what is referred to as a double taxation. First, the corporation itself is taxed on the profits it makes and when those profits are distributed to the Shareholders as a dividend, the Shareholders report the dividend as income on their individual tax returns. So essentially you are paying taxes twice on the same money your corporation makes, thus the double taxation.
An S Corporation is a tax election a C Corporation can make in order to eliminate the corporate level tax. This allows the earnings to pass through the corporation to the Shareholders. You only pay taxes once on the earnings. This is a great tax advantage, possibly cutting the taxes on a corporation’s profits in half. However, you must qualify in order to elect to be taxed as a Sub S. The essential requirements are:
- The corporation cannot have more than 100 shareholders
- All shareholders must be either a US citizen or permanent resident
- The corporation cannot have more than 25% of its income derive from passive activities (i.e. money from rents, property ownership or investments)
- The corporation can only have one class of stock (i.e. no preferred stock, but you may have voting and non voting common stock)
Even though you do not pay income taxes for the S Corporation a tax return must still be filed on behalf of the corporation.
What is the difference between a Corporation and an LLC?
An LLC can be more flexible than a corporation. With an LLC anyone can be an owner including another LLC or corporation or a foreign citizen. The LLC is a pass through entity meaning there is no corporate level tax return. All of the income and expenses are passed through to the owners who report their share of the income and expenses on their individual tax returns. Members of an LLC also can agree to divide the profits differently from time to time rather than split the profits according to share ownership. Additionally, there is no limitation to the amount of passive income an LLC can earn. Finally, there is technically no “piercing of the corporate veil” of an LLC in Illinois. However, courts will still hold LLC owners liable for not treating the LLC as separate from themselves. Therefore, an LLC should still follow corporate formalities.
The downside is that the LLC is more costly to set up and maintain in Illinois. The filing fees and the annual fees are 2 to 2.5 times that of a Corporation. Another disadvantage is in the situation of a single member LLC. Sole owners of an LLC are taxed as if they are self employed. This is usually not the best tax position for a business owner. Also, the sole owner of an LLC must be extra careful to treat the LLC as a separate legal entity. Some states have found single member LLC owners to be personally liable, essentially removing any liability advantage of forming an LLC in the first place, though Illinois has not yet followed these decisions.
Choosing what type of entity to form is a very important decision which can affect your personal liability and your tax situation. It is very important to obtain solid advice from someone with experience. AMC Legal can provide you with essential information and sound legal advice so that you can make the best decision for your company’s future.
Please view the comparison chart for a side by side evaluation of the different entities.
S Corporation vs. LLC
When comparing the S Corp vs. LLC you must consider your own personal situation. I highly recommend that you speak to an attorney before making your final decision since it can be a costly mistake not only in wasted filing fees but also in overpayment of taxes. You should also consider discussing your personal situation with an experienced CPA.
Both entities are pass through entities which means the income and expenses will get passed through the business to the individual owners’ tax returns. Therefore neither will pay any taxes on behalf of the business like a C Corporation would.
Typically an S Corporation is better for tax purposes. With an S Corporation you will pay yourself, the owner, as an employee of the corporation. You pay yourself a reasonable salary for the type of work you perform, usually about 50% of the profits. Therefore you will pay the Social Security/FICA taxes on that 50% rather than 100% as you would if you were self employed under an LLC or a sole proprietorship. This can be a great tax advantage since those taxes equal 15.3%. Therefore you’ll be paying 15.3% on 50% of the profits rather than 100% of the profits under an LLC.
Both the LLC and S Corporation have similar liability protection. Don’t be swayed just because the LLC is called a Limited Liability Company. Both limit the personal liability of the owners. In fact, the LLC was created to combine the liability benefits of a corporation but also to make it more flexible.
The LLC is better for some situations and again, it depends on your specific situation. For instance, if you don’t qualify for an S Corporation such as you are a foreign citizen or you are going to own property, then the LLC may be better suited to your needs. As mentioned above, the LLC can also be more flexible.
You must weigh what is most important to you. In most situations the S Corp is usually the best bet. It is cheaper to set up and maintain than an LLC (at least in Illinois, you would have to check on other states), it can save you more money on income taxes, and if you use an experienced law firm like AMC Legal, you won’t have to worry about how to set up the corporation and maintain it, we can do that for you so you can concentrate on building your business.
What is a Series LLC?
Illinois is one of few states that allows an LLC to be formed as a Series LLC. When a Series LLC is set up, a parent LLC is created along with one or more Series or subsidiary LLCs. Each Series can have its own members, managers, officers and operating agreements. The benefits of a Series LLC is that each Series will have its own ownership, management and best of all its own liability. The liability of each Series is kept separate from the other Series. Another advantage is that although the accounting is separate for each, you can file a single tax return.
This type of arrangement is especially beneficial to those who own several pieces of real estate. The parent can be set up as the holding company and each property is owned by a different series. This way if a liability is created on one of the properties (say a renter is injured) only the assets held in that Series will be at risk. The other properties would be protected.
Keep in mind that if the parent holding company assumes any risk by placing property or doing business with that Parent company, it will trickle down to each Series, therefore, placing the assets in each Series at risk. However, the liability will not flow up to the parent LLC.
There are a few caveats to keep in mind. Naming the Series is not pretty. Each Series will bear the full name of the parent LLC plus the name of the Series LLC. DBAs are not allowed for Series LLCs. Therefore, if you have a tradename you want to protect you must keep this in mind.
An additional benefit of a Series LLC is the cost savings from setting up separate LLCs for each property. Instead of paying to incorporate each LLC separately you can add a Series LLC for a lower price. Also, instead of paying a full annual report fee of $250 for each separate LLC, you will pay $250 for the parent plus $50 for each Series.
How a Series LLC is taxed depends on how it is set up. The IRS has not yet made a determination on how to tax Series LLCs, therefore, it is recommended that you speak to a tax professional familiar with Series LLCs regarding this issue.
How Does an S Corp Save You Money on Taxes?
First let’s talk about the C Corp. The C Corporation has double taxation. First, the corporation itself pays corporate tax and then the Shareholders pay taxes again on the money they take out of the corporation.
The LLC and S Corp are both flow through entities. This means that there is no corporate level tax like the C Corporation. Therefore, the income (and expenses and taxes) flow through to the owners’ personal tax returns.
The difference between an LLC and an S Corp is that all of the LLC’s income is assessed a self-employment tax. At the time of this article (2015) the self-employment tax rate is 15.3%. Self-employment taxes are the taxes you pay for Social Security and FICA. So, on 100% of the LLC income the owners would pay 15.3%. For simplicity’s sake, let’s say a single member LLC makes $100,000 in profits in 2015. The self-employment tax would be $15,300 (100,000 x 15.3%).
Now let’s look at an S Corp. As an S Corp Shareholder you register yourself as an employee of the business. You are technically not self-employed but an employee of your corporation. You would pay yourself as salary, or wages, what someone in your industry typically makes or approximately 50% of the profits (this varies from business to business and even shareholder to shareholder so discuss this and all tax particulars with your accountant or CPA). The other 50% you would pay yourself as a distribution. This distribution would be taxed at whatever your personal income tax rate is but will not be assessed the self-employment tax.
So let’s illustrate this. As in the situation above, an S Corp earning $100,000 in income would pay 7.65% in self-employment taxes or $7,650 as opposed to the $15,300 in taxes to an LLC.
$15,300 vs. $7,650 in self-employment taxes. Which would you rather pay?