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Corporation vs LLC

We’re talking about the difference between a corporation and a limited liability company (LLC).

A corporation is owned by shareholders and a limited liability company is owned by members.

Both the corporate shareholder and the LLC member can be protected from liability when the company itself is sued.

When a person is sued however, the limited liability company has asset protection so the ownership of the limited liability company can be protected from having his membership in the LLC being taken away. Nevada has similar laws that apply to corporations. So one recommendation in most states when operating a business as a corporation is to own the shares of stock in an asset protection trust, to help prevent the shares from being taken in a personal lawsuit.

corporation vs llc chart
Corporation Vs. LLC Chart

More Corporation vs LLC Information

So, if your company represents a brick wall. If you or one of your employees hits someone with their car during work hours and your business is sued for more than you insurance coverage, does that company protect you from losing your home, your personal bank accounts and investments? As long as your company is set up and run right both a corporation and LLC may do so.

On the other hand, if you are driving out to dinner Saturday night and the same thing happens, and you are sued personally, is your business protected from being taken away from you? An LLC with more than one owner or in Nevada and Wyoming an LLC with one owner has provisions to protect help the seizure of your business.

The leader of a corporation resides in the officers and directors. With a limited liability company, it’s in the managers or the members. Officers of a corporation for example are the president, secretary, treasurer and the chief executive officer, for example.

Members of the Board of Directors typically elect and dismiss the officers of the company and often aren’t involved in the day-to-day activities of the company. For the limited liability company, I often prefer the manager managed limited liability company because the manager of an LLC doesn’t necessarily have to have any ownership and they can have 100% control if the operating agreement allows it. So when they are sued personally they don’t have an asset to take, they simply have a position. They can be the only signature on the bank account, can have 100% control of the company and have little or no ownership themselves.

The guidelines of a corporation are in the bylaws. And in the Limited Liability Company they are in the operating agreement.  The bylaws and the operating agreement have provisions that aren’t covered in the law such as when the officers can be elected, when and where meetings are held. With the limited liability company, the operating agreement is a very important document because it talks about the asset protection, when the members are sued, how their interest is protected from being taken away from them in a lawsuit, etc.

Lawsuit Protection Corporation vs LLC Information

Both the Corporation and Limited Liability Company offer lawsuit protection. So when there is a lawsuit on the business side of the company brick wall, the owners of a corporation or limited liability company can be protected from that lawsuit jumping over and taking away their home, their car, their bank account, and everything they worked so hard for, so unlike a sole proprietorship or general partnership, both the corporation and the LLC can provide lawsuit protection for the owners when the business is sued.

Asset Protection Corporation vs LLC Information

Asset protection on the other hand, is when the person is sued themselves. Let’s say somebody’s driving on a Saturday night and they rear end somebody in their car, the assets inside the company and the company itself can be protected if it’s a limited liability company. However, the corporation’s shares of stock may be taken away from that individual shareholder (with the exception of a Nevada corporation) so the recommendation again is if one owns shares of stock in a corporation, those shares of stock should be held in an asset protection trust.

How a Corporation is Taxed vs an LLC

The corporation by default in the United States, and were talking about a 4 profit corporation is taxed as a C corporation. The “C” as a memory can be thought to be a corporation because the corporation pays its own income tax.

If one fills out the 2553 tax form the corporation can be taxed as an S corporation. The S Corporation has benefits for many small business owners because the distribution to shareholders of an S corporation are not subject to the Social Security or Medicare taxes totaling 15.3%. So when one pays a reasonable salary out of the company, then pays the rest of the money out as a distribution to shareholders, for every $10,000 one pays themselves in that way there’s $1530 saved in taxes which the 15.3% savings on distribution and S Corporation Shareholders

The limited liability company can be taxed 4 ways. By default, the limited liability company can be taxed when there’s one owner as a sole proprietorship or disregarded entity. What that means is there’s no tax at the company level. The tax burden flows through the company to the owners, which makes it an excellent choice to own real estate and stock market investments because the tax deductions flow through to the owners and there’s no tax at the company level.

A C and S corporation taxation on the other hand can only have a certain amount of passive income without significant tax penalties. When there are two or more owners of the Limited Liability Company its taxed as a partnership by default, similar to disregard the entity type of taxation, the tax burden flows to the owners and there’s not a tax on the income at the company level.

If one properly fills out an 8832 form, the limited liability company can be taxed as a C corporation and that way the limited liability company pays taxes on its own income. In addition, if one fills out the 2553 form, the LLC can be taxed as an S corporation. So there are 2 ways typically that a for-profit corporation is taxed: S Corporation C Corporation. And 4 ways the limited liability company is taxed. Disregarded entity (by default with one owner), partnership (by default with 2 or more owners), and with a simple filing or two a C Corporation or an S Corporation.

The Double Taxation Myth

Let’s talk about the double taxation myth. I call it a myth because double taxation only applies when dividends are paid. The profit that results in the payment of a dividend is taxed the company level and then when the shareholder receives the dividend that income is taxed on a personal level. So like when my mother said when i touched the hot stove, she said, “Son I suggest you not do that again.” The same thing for small business owners is highly recommended in most cases: do not to pay dividends, so there’s no double taxation. Take it from Warren Buffett. His company has a strict no dividend policy. So, again I call it a double taxation myth because one doesn’t necessarily have to pay dividends in most cases. So pay a salary which is tax deductible to the corporation, a bonus which is tax deductible, or an S corporation distribution to shareholders which is also not taxed at the company level.

When to Use a Corporation vs LLC

When do you use a Corporation or and LLC? Either a corporation or an LLC may be appropriate to operate an “Active” business such as a Construction Company, barber shop, car sales company or import-export business. If you intend take your company public and sell stock, a corporation is the proper tool.

Now, one may use a limited liability company that hold passive investments, such as real estate, stocks, and so on because the deductions flow through and there’s not a tax at the company level.

So, the above summarizes some of the main differences between a corporation and an LLC. If you need more information there is a number on this page or a form that can be completed to get more help.