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Forming LLC or S Corporation considerations - If you expect that the company will be closely held and you intend to benefit from the company’s growth by distributing earnings rather than selling the business, then Forming LLC is generally better. However, if you expect to bring in other investors, grow the business and then offer it for sale, an S corporation is the better choice.
Forming your LLC Corporation with CorpLLC Corporation is straight forward. All you will need to do is answer our questions and CorpLLC Corporation will draft and file your application. Within a few weeks, you will be able to operate your business under the protection of your new corporation.
Prepare for free. Pay when you’re ready! - CorpLLC Corporation provides a personal user friendly secure work space to manage your corporate filings and intellectual property applications online. You will easily and quickly be able to prepare, save, revise and submit when forming LLC or S Corporation.
- Get your LLC Formation material organized
- Answer easy to read questions
- Fill out the necessary step-by-step LLC forms
- Get expert help through online, email, and phone support
- Check your progress
- Save your work so you don’t have to start over from scratch
- Return later after you gathered information or just needed to take a break
- Revise your LLC formation material and forms
- Submit and pay when ready
- Check your LLC application status online with the Secretary of State.
Utilizing your LLC Formation information, CorpLLC will complete, review, process, and submit your application to the appropriate government agency. Typically within a few weeks, you will be able to operate your business with the Limited Liability corporate protection that you require.
Whether you are Forming LLC, S Corporation, or protecting your intellectual property CorpLLC Corporation provides a secure Corporate Identity Office and Intellectual Property Workspace.
When starting a business, entrepreneurs are often faced with a choice of what form of business entity they should use. The basic choices are whether to form a corporation or a limited liability company. If the decision to form a corporation is made then the choice is whether to form a “C” corporation, which is subject to tax at the corporate level, or an “S” corporation, which has “flow-through” taxation.
Flow-through taxation means that the net income of the corporation is taxed to the owners, and, in general, dividends are paid on a tax-free basis. Both limited liability companies and S corporations have flow-through taxation. Given this, the choice for start up companies is often between a limited liability company and an S corporation. In general, if you expect to bring in other investors, grow the business and then offer it for sale, an S corporation is the better choice. If on the other hand, you expect that the company will be closely held and you intend to benefit from the company’s growth by distributing earnings rather than selling the business, an LLC is generally better.
When choosing between, Forming an LLC and as S corporation, however, there are two tax issues that may override other considerations. The first issue concerns employment income. If the owners of an LLC are active in the business of the LLC, then more likely than not all of the business income of the company will be taxed to the owners as employment income and be subject to employment taxes (social security, Medicare, etc.) as well as income tax. On the other hand, with an S corporation only the amounts paid out as salaries to the owners (as long as the amounts of the salaries are reasonable) will be treated as employment income and be subject to employment taxes and income tax. The remainder of the earnings will only be subject to income tax. These earnings may be distributed to the owners as dividends without any additional tax.
The second issue concerns getting assets out of the business entity. With an S corporation, if the value of an asset exceeds its tax basis to the corporation, then when the asset is distributed the untaxed appreciation in the asset will be taxed. Forming an LLC on the other hand, assets may generally be distributed without taxation and the distributee will take a carry-over tax basis in the asset.
Key Characteristics of Business Entities
C Corporations
Can have an unlimited number of shareholders, domestic or foreign
Can have preferred as well as common stock
Does not have flow-through taxation
Except for certain closely held corporations, are not subject to passive loss and at-risk rules
Since corporate tax is graduated, tax on earnings left in business may be lower with a C corporation than an S corporation
S Corporations
Flow-through taxation
Limited to 75 shareholders
No entity shareholders or foreign shareholders
Can only have one class of stock
Untaxed appreciation on assets distributed to shareholders is taxed at time of distribution
Can allocate business income between salary and dividends
Shareholders are subject to passive loss and at-risk rules.
Limited Liability Companies
Flow-through taxation
Can have an unlimited number of owners
Can have multiple classes of ownership interests
Subject to complicated partnership taxation rules
Can distribute assets without paying tax
For owners who are active in the business all income may be taxed as employment income
Owners are subject to passive loss and at-risk rules.
Considerations in Choosing Between a Corporation and Forming LLC
Use a corporation when:
Few assets (getting assets out of corporation requires recognize gain on appreciated assets)
When will have many owners and need to raise a lot of capital
When need corporate form to exit from business through a tax-free reorganization with another corporation
When expect to acquire businesses through tax-free reorganizations with other corporations
Use a C Corporation when there will be foreign investors or pension fund or other tax-exempt investors (a partner in a partnership is deemed to be “doing business”)
Use an S corporation when the entity will be closely held by U.S. individuals, flow-through taxation is desired and want to be able to divide earnings between employment and other income
Forming LLC (general partnerships and limited partnerships and are seldom used now; sometimes real estate development funds or venture capital funds still use limited partnership form) when
Want maximum flexibility to structure flow through tax consequences
Want to take advantage of partnership debt rules to be able to deduct more losses in the start up phase of an entity (in S corporation can only deduct up to equity plus amounts loaned by shareholder, in partnership can deduct up to equity, plus member loan, plus allocable share of third-party loans). Sometimes can change over to a corporation later. Be careful, however, because LLC debt assumed by the corporation counts may result in income to the owners, and if the incorporation is to be followed by a tax-free reorganization there may have to be a significant waiting period.
Want to be able to put assets in and take assets out of business without being taxed (only distributions of cash in excess of basis are taxed in a partnership, other assets generally come out with a carry-over basis)
Want flow-through taxation but can’t use an S corporation because an entity or a foreigner will be an owner.
Want flow-through taxation and want to issue multiple classes of membership interests
Want a single-member LLC just for liability protection (single-member LLCs are disregarded for tax purposes)
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