A corporation or an LLC?
Updated: Jun 11, 2020
Choosing between a corporation and an LLC
What business entity would best serve your particular needs? That question is a bit tricky to answer. The following, is a short description of some of the basic differences and considerations between two of the most popular business entities for businesses: the corporation and the LLC.
Let’s start with corporations
The most common types of corporations are the C corporation, the S corporation, and the professional corporation. All three have the following characteristics: separate existence from its owners, centralized management, and limited liability for its owners.
What is a main difference between a C corporation and an S corporation?
When a corporation is in the news, chances are that the corporation is a C corporation. The standard corporation is the C corporation, and many large businesses (think Apple) are C corporations.
One key characteristic of a C corporation is that it is subject to “double taxation.” Double taxation means that the corporation itself is first taxed as a separate entity on the corporate income. In addition, shareholders receiving dividends from the corporation are personally taxed. Thus, the money the corporation is generating is taxed two separate times.
In contrast, an S corporation is corporation where its owners have chosen to file for Chapter S status with the IRS. By filing for Chapter S status, the S corporation is not taxed at the corporate level. The only taxation is on the individual level. Thus, taxation occurs only once.
Given that a C corporation is subject to double taxation, why would anyone choose to form a C corporation over an S corporation? The reason is because only certain businesses may file for Chapter S status. For example, in order to be eligible to elect Chapter S status, a corporation must have 100 shareholders or less. So, if you have business where you are expecting to have numerous shareholders, an S corporation may not be an available option to you.
What about Professional corporations?
In the past, licensed professionals, such as lawyers, physicians, dentists, and accountants were prohibited from creating a corporate entity to provide professional services. However, licensed professionals are now able to form a professional corporation to gain the benefits of incorporation. A professional corporation has the basic characteristics of a C or S corporation, such as limited liability for its shareholders, centralized management through a board of directors, and a separate existence from its owners. Under a professional corporation, licensed professionals only render the professional services they are licensed to practice.
Of course, there are some drawbacks to forming a professional corporation. For example, there are certain limits that the law imposes on who can become a shareholder of a professional corporation. Further, there are particular rules that must be followed in order to properly form a professional corporation. However, every business is different, and a professional corporation might be a good option for some licensed professionals looking to take advantage of the benefits the corporate form will provide.
Let’s turn to LLCs
An LLC, short for limited liability company, is an alternative to the corporate business form. In recent years, the LLC has become the predominant business entity choice in California. In many ways an LLC has the same qualities as a corporation. For example, an LLC is considered a separate entity apart from its owners, and it provides limited liability for its owners. In addition, if the creators of the LLC choose to create an LLC that is manager-managed (the company is managed by a few selected people), as opposed to member-managed (the company is managed by all the owners), then the LLC can be structured to have centralized management, just like a corporation.
LLCs have other differences as well. An LLC is taxed differently than a corporation. An LLC is not subject to double taxation, which makes it unlike a C corporation. However, an LLC is also subject to a graduated fee when earnings of the LLC exceed $250,000, making it unlike an S corporation. In addition, if the business you are trying to form is a regulated business or profession under the California Business and Professions code, you can only be an LLC if authorized by statute. For example, one cannot form “the Law office of John Smith, LLC.”
Additionally, an LLC operates in a less formal manner. For example, corporations must follow strict formalities, such as holding shareholder meetings, having a board of directors, having corporate officers, having separate books and records, and the minutes of board meetings must be recorded. In contrast, an LLC does not need to follow these same strict operational requirements. Thus, LLCs might be an attractive option for those who do not want to become involved in the procedures required when operating a corporation.
Which should you choose?
Maybe you already have a business and think that a change in your business entity form could provide you new advantages, or maybe you are forming a business for the first time and want to get off on the right foot. All businesses are different. In no way does the above capture the full range of considerations when forming a business entity. Consult with a lawyer and your tax advisor to determine which business entity is the best fit for your business.
The information in this blog is intended only as general information, and under no circumstances constitutes legal advice, nor does it create an attorney-client relationship. The information should not be relied upon as a substitute for specific legal advice concerning your particular situation.
For advice specific to your situation, contact us for an appointment.
About the Koons & Riswold Auburn Law Office
Koons & Riswold maintains its main office in Auburn, California to provide clients with legal services in Auburn, as well as the greater Placer County region. Our Auburn lawyers provide legal services well suited to the Auburn area, which include: Living Trust and Estate Planning services, Probate, Real Estate legal issues, and Business Law matters. All our lawyers have deep roots in the Auburn area, having strong familial, community, and professional ties to the region. Koons & Riswold has recently opened a satellite office in Rocklin, California for the purpose of providing Living Trust and Estate Planning services there.