Types of Companies > C-Corporation (Stock) > INC vs. Proprietorship, Partnership & LLC

INC vs. Proprietorship, Partnership & LLC

Limited liability companies are a type of business entity that combines the personal liability protection of a corporation with the tax benefits and simplicity of a partnership. In addition, there are other important differences between corporations and LLC's. The following discusses the main advantages and disadvantages of corporations versus LLCs.

Advantages of Corporations:

Profits are not subject to social security and medicare taxes.
Salaries and profits of an LLC are subject to self-employment taxes, currently equal to a combined 15.3%. With a corporation, only salaries, and not profits, are subject to such taxes. This advantage is most significant for stockholder-owners who take a salary of less than $72,600.
Example:
If a sole proprietorship earns $50,000, a 15.3% tax would have to be paid on the entire $50,000. If a similar organization was a corporation and also earns $50,000, but $30,000 of that amount is paid in salary, and $20,000 is classified as profits, the self-employment tax would not be paid on the $20,000 profit. This saves the stockholder-employee over $3,000 per year. The IRS knows what is a reasonable range and such tactics may improve your chances of a time and money wasting tax audit. In situations where the IRS feels that shareholders are taking too little in salary, the IRS will characterize all or part of the profits as salary.

There is a greater understanding of the corporate form.
Because limited liability companies are still relatively new, not everyone is familiar with them. In some cases, banks or vendors may be reluctant to extend credit to limited liability companies. Moreover, there are restrictions as to the type of business that an LLC may conduct in some states.

More variety and fewer taxes on fringe benefits.
Corporations can offer a wider variety of fringe benefit plans than any other type of business entity. An array of retirement, stock option and employee stock purchase plans are available only for corporations. Plus, while sole proprietors, partners and employees owning more than 2% of an S-corporation must pay taxes on fringe benefits (such as group-term life insurance, medical reimbursement plans, medical insurance premiums and parking), stockholder-employees of a C-corporation do not have to pay taxes on these benefits.

Tax Flexibility:
While C-corporations are subject to double taxation, they also offer greater tax flexibility. A C-corporation does not have to immediately distribute its profits to shareholders as a dividend.

Disadvantages of Corporations versus LLC's

Corporations must hold regular meetings of the board of directors and shareholders and keep written corporate minutes.
Members and managers of an LLC need not hold regular meetings, which reduces complications and paperwork.
Ownership restrictions for S-corporations.

S-corporations cannot have more than 75 stockholders. And, each stockholder must be an individual who is a resident or citizen of the United States. Also, it is difficult to place shares of an S-corporation into a living trust. None of these restrictions or difficulties apply to an LLC.

Shareholders of C-corporations cannot deduct operating losses.
Members who are active participants in the business of an LLC are able to deduct operating losses of the LLC against their regular income to the extent permitted by law. Shareholders of an S-corporation are also able to deduct operating losses, but not shareholders of a C-corporation.

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