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Difference Between a Corporation and LLCSometimes, the simplest of questions can result in complex answers. This definitely occurs when one asks the difference between a corporation and LLC. To understand the difference between a corporation and LLC, one must first grasp what they are. Both are business entities that offer business owners protection from personal liabilities of the debts and obligation of a business so long as the entity is run within certain parameters. Corporations have been an accepted business entity for hundreds of years. LLCs, on the other hand, only came into existence through a governmental act. They were first created in Wyoming in the late 1970s for the purpose of giving small businesses an entity to call their own. A cynic would think they were created to generate fees for a financially strapped Wyoming, but there is little doubt that the entity became popular and all states now have legislation allowing businesses to be formed. Okay, so what are the big differences already? The biggest touted difference has to do with formality. For a corporation to provide shareholders with protection from personal liability, it must be run in a certain way. This means there must be meetings, motions to pass resolutions, and more than a bit of red tape to be gone through. An LLC, on the other hand, requires a minimum of one meeting a year and that is it. Another area where big differences arise is in the world of tax. Stop yawning! A corporation is typically double taxed. This means it pays taxes on its gains and then shareholders have to pay taxes on the distributions they receive from the corporation. LLCs, in turn, can classify themselves as partnerships for tax purposes. This means the LLC does not pay taxes. Instead, the profits are “passed through” to the owners who then pay the taxes on their personal income tax returns. The tax advantages of an LLC may seem great, but they are nominal at best. First, a corporation can elect to be an “S” corporation, which means the revenues are passed through to the owners much like an LLC. Second, an LLC can be problematic for a business owned by a single purpose. The IRS doesn’t allow the LLC to select to be taxed as a partnership in such a situation because there is only one person. You need two to be a partnership. The end result is the LLC is taxed as a sole proprietorship and the owner gets stuck paying the 15.3 percent self-employment tax. Sufficiently confused, yet? All and all, the difference between a corporation and LLC in California is significant. The question most want answered is which is best for their business idea. There is no right answer. The corporation is best for some businesses while the LLC is the answer for others. |
