LLC vs Corporation
LLC Vs Corporation – Which Will Save You Bundles Of Money?
So you are thinking of starting a business and you want to make sure that you use the right vehicle to keep your taxes low and protect your assets in case of a lawsuit. There are many different corporate forms and it can be very confusing when you are trying to decide which is best suited to your business. A lot of business owners take a look at how the advantages and disadvantages of an LLC vs Corporation might benefit them when creating their business plans.
So what are the major differences between a limited liability corporation and your every day corporation? Well both entities are sufficient for limiting liability, the assets of the entity are kept separate and distinct for the most part from the personal assets of the owners, meaning that only in the very rarest of cases can an individual seize personal assets by suing the corporation.
One major difference is that the owners of a limited liability corporation are comprised of members, not share holders, these members are owners of the business and they make or lose money from the operation of the business based on their share of the entity. The rights, privileges, and percentage of ownership are set out in documents that are made at the inception or closely after the founding of the legal entity.
The articles of organization, or in some states the certificate of organization, will usually spell out the nature of the business, the new limited liability corporation’s registered agent, and who the members are who own and manage the business. Many states also require new businesses to file an operating agreement. This operating agreement can in many instances even give the specific percentages of ownership by the members with their management roles and duties.
Two of the main reasons most business people prefer this business structure is the pass through feature, meaning the profits and losses of the business can pass through to the members. Many elect this form of ownership because it means you don’t have to file a separate tax return, it also means that the money is only taxed once, instead of the double taxation some forms of incorporation entail.
Incorporating on the other hand means that the business entity that is created is a distinct and separate entity. Having a corporation is usually more burdensome record keeping and taxation wise than owning an LLC. A board of directors must be elected with minutes kept, bylaws adopted, and filing of paperwork yearly with most states. Many corporations are also subject to the above mentioned double taxation. If you are a large shareholder of a corporation the company is taxed on earnings, and then so are you when money is passed to shareholders through a distribution or dividend. This can mean less overall earnings from the business venture.
Maybe a hypothetical example would help:
A two person corporation makes $500,000 in Profit:
As a traditional corporation the $500,000 would be subject to taxation, let’s say around 35%.
$500,000 x 35%= $175,000
his two person corporation splits the remaining profit equally for dividends and distributions of $162,500 each.
The two owners of the corporation would then have to pay taxes on the dividend.
The current tax on dividends with the Bush tax cuts is 15%, but they were close to 40% during the Clinton administration.
So further tax would be paid on the $162,500 of each shareholder of $24,375 leaving $138,125 for each share holder.
Bringing the total taxed amount to $223,750.
In an LLC the earnings would pass through to the members, in this case two people, and we will assume their operating agreement has them split the money equally.
So in this instance each member would receive $250,000 in income on their personal tax returns, which would allow them the flexibility to pursue different means of lessening their tax burdens.
The limited liability corporation is especially popular with real estate holding companies. Using depreciation real estate investing can sometimes create paper losses, even if the real estate is generating profits. These losses can pass through to the owners creating deductions that can significantly lessen the tax burden to the individuals who make up the firm.
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