What are the Differences – LLC vs Corp?
The biggest difference between a LLC and a corporation is the way that the LLC is taxed compared to the corporation. The LLC can choose various methods of taxation, they can choose to be taxed as a partnership, or they can opt to be taxed as a corporation. Most LLC’s opt for the partnership taxation because it allows them to take advantage of pass through taxation. Corporations on the other hand are not eligible for pass through taxation, they often face double taxation because the profits are taxed at the corporation’s level and then the dividends are taxed at the individual level. The only way to get around this difference is to elect to form an S Corporation, which there are several s corporation advantages that make choosing an s corporation the right choice.
When looking at an LLC vs S corp the first thing that you might notice is that while both allow pas through taxation that is where the similarities end in regards to taxation. If you choose an S corp instead of an LLC for your business when it comes time to pay the self-employment tax shareholders of the S corp are not going to have to pay the self-employment tax on all of the income like LLC members have to. Instead, shareholders of an S corp only have to pay self-employment tax on what would be considered a reasonable salary.
Another difference between the LLC and the S corp is the franchise tax. In an S corp, the franchise tax is going to be waived for the first year, but for an LLC you must pay the franchise tax the first year. How the profits and losses are distributed is also different when it comes to LLCs and S Corps. With an S corp there is profits and losses are spilt up based on the percentage of the company that the shareholder has. With an LLC, special allocations can be made to how the profits and losses are spilt up, as long as it is included in the operating agreement.