Structuring your business as a Limited Liability Company (LLC) or Corporation

Many business owners are often faced with the difficult task of deciding which type of entity structure to choose when starting a business. The two most common types they are generally faced with are LLC or Corporation. Although there are advantages and disadvantages to both, an owner should carefully choose which type will benefit them most, not only from a tax standpoint but also for other business purposes.

Below are some general facts to consider when selecting an entity structure:

  • Payments for Services and profits of LLC owners are subject to self-employment taxes, currently equal to a maximum combined rate of 15.3%. With a Corporation, only payment for services to owners (and not profits) are subject to such taxes.
  • LLC Owners will pay only one level of income tax on profits. For a Corporation two layers of tax apply, one at the entity level when profits are earned and another when such profits are distributed to its owners. However a Corporation may make an “S” election (applicable only to qualifying small business under the Tax Code) which will generally apply only one level of tax on profits, similar to an LLC.
  • Fringe benefits are includable in income for LLC members. Only certain benefits may be taxable to Corporate owner/shareholders
  • A new investor or transferee owner by reason of death may be able to recoup a portion of its investment in a LLC via future tax deductions as a result of certain built-in gains of the entity. There is generally no such blanket provision for a Corporation, with certain exceptions.
  • Distribution of appreciated property to owners of a LLC is generally not taxable. Such distribution from a Corporation will trigger gain (but not loss) as if the property was sold.
  • Limited Liability company structure has more flexibility than that of a corporation. While a corporation has to be run by its officers with input from its shareholders, a limited liability company can be run by the owners of the business or managers to whom the owners of the business delegate the duties.
  • LLC may not be viewed as the choice entity when it comes to making a capital investment in a company. Many prefer a Corporation since it allows for easier entry in obtaining ownership and the ability to more easily raise capital in the public market.