LLC vs C Corporation vs S Corporation Entities LLC Limited Liability Company C Corporation S Corporation Characteristics Unlimited number of Unlimited number of members Up to 100 shareholders; only one class Ownership Rules shareholders; no limit on stock allowed of stock allowed classes Personal Liability Generally no personal liability of the Generally no personal liability Generally no personal liability of the of the Owners members of the shareholders shareholders Corporation taxed on its With the filing of IRS Form 2553, a C The entity is not taxed (unless chosen earnings at a corporate level and Corporation becomes a S Corporation, Tax Treatment to be taxed); profits and losses are shareholders are taxed on any where the profits and losses are passed passed through to the members distributed dividends through to the shareholders Articles of Incorporation; Articles of Incorporation; Bylaws; Key Documents Articles of Organization / Certificate Bylaws; Organizational Board Organizational Board Resolutions; Needed for of Formation; Operating Agreement Resolutions; Stock Certificates; Stock Certificates; Stock Ledger; IRS Formation Stock Ledger & State S Corporation election The Operating Agreement sets forth Board of Directors has overall Board of Directors has overall Management of the how the business is to be managed; a management responsibility; management responsibility; Officers Business Member (owner) or Manager can be Officers have day-to-day have day-to-day responsibility designated to manage the business responsibility The members typically contribute Shareholders typically purchase Shareholders typically purchase stock Capital money or services to the LLC and stock in the corporation, either in the corporation, but only one class Contributions receive an interest in profits and common or preferred of stock is allowed losses [email protected] 617-610-9616 Disadvantages of the Limited Liability Corporation ■Earnings of most members of an LLC are generally subject to self-employment tax. By contrast, earnings of an S corporation, after paying a reasonable salary to the shareholders working in the business, can be passed through as distributions of profits and are not subject to self-employment taxes. ■Since an LLC is considered a partnership for Federal income tax purposes, if 50% or more of the capital and profit interests are sold or exchanged within a 12-month period, the LLC will terminate for federal tax purposes. ■If more than 35% of losses can be allocated to nonmanagers, the limited liability company may lose its ability to use the cash method of accounting. ■A limited liability company which is treated as a partnership cannot take advantage of incentive stock options, engage in tax-free reorganizations, or issue Section 1244 stock. ■There is a lack of uniformity among limited liability company statutes. Businesses that operate in more than one state may not receive consistent treatment. ■In order to be treated as a partnership, an LLC must have at least two members. An S corporation can have one shareholder. Although all states allow single member LLCs, the business is not permitted to elect partnership classification for federal tax purposes. The business files Schedule C as a sole proprietor unless it elects to file as a corporation. ■Some states do not tax partnerships but do tax limited liability companies. ■Minority discounts for estate planning purposes may be lower in a limited liability company than a corporation. Since LLCs are easier to dissolve, there is greater access to the business assets. Some experts believe that limited liability company discounts may only be 15% compared to 25% to 40% for a closely-held corporation. ■Conversion of an existing business to limited liability company status could result in tax recognition on appreciated assets. [email protected] 617-610-9616 .