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C Corporation
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S Corporation
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LLC
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Who owns business?
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shareholders
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same as C
corporation
|
members
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Personal liability for business
debts
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no personal
liability of shareholders
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same as C
corporation
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no personal
liability of members
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Restrictions on kind of business
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some states prohibit
formation of banking, insurance and other special
businesses
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same as C
corporation --but excessive passive income (such as from
rents, royalties, interest) can jeopardize tax
status
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same as C
corporation
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Restrictions on number of owners
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most states allow
one-person corporations; some require two or more
shareholders
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same as C
corporation, but no more than 75 shareholders
permitted
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some states still
require two members but are expected to allow one person
LLCs soon
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Who makes management decisions?
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board of
directors
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same as C
corporation
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ordinarily members;
or managers if manager-managed LLC
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Who may legally obligate business?
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directors and
officers
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same as C
corporation
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ordinarily any
member; or any manager if manager-managed
LLC
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Effect on business if an owner dies or
departs
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no
effect
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same as C
corporation
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in some states,
dissolves unless remaining members vote to continue
business
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Limits on transfer of ownership
interests
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transfer of stock
may be limited under securities laws or restrictions in
Articles or Incorporation or Bylaws
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same as C
corporation --but transfers limited to persons and
entities that qualify as S corporation
shareholders
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unanimous consent of
non-transferring members may be required under state law
or operating agreement
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Amount of organizational paperwork and
ongoing legal formalities
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annual meetings of
shareholders required and minutes
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same as C
corporation
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operating agreement
necessary; meetings not normally required
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Source of start-up funds
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initial shareholders
(in some states, cannot invest with promise to perform
services or contribute cash in the future)
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same as C
corporation --but cannot issue different classes of stock
with different financial provisions
|
members (may invest
with promise to perform services or contribute cash in
the future)
|
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How business usually obtains capital, if
needed
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flexible; outside
investors (may offer various classes of shares); bank
loans backed by shareholders' personal assets (if
corporation has insufficient credit history); may go
public if need substantial infusion of cash
|
generally same as C
corporation --but can't have foreign, partnership or
corporate shareholders; must limit number of shareholders
to 75; can't offer different classes of stock to
investors except for shares without voting
rights
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capital
contributions from members; bank loans backed by members'
personal assets (if LLC has insufficient credit
history)
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Ease of conversion to another business
form
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may change to S
corporation by filing simple tax election within 75 days
of new fiscal year
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generally same as C
corporation --may terminate S tax status to become C
corporation but cannot reelect S status for five years
after
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may change to
general or limited partnership or corporation; paperwork
involved
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Is establishment or sale of ownership
interests subject to federal and state securities
laws?
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issuance or transfer
of stock subject to state and federal securities laws or
must qualify for securities laws exemptions
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same as C
corporation
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probably not, if all
members are active in business
|
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Who generally finds this is the best way
to do business?
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owners who want
limited liability and ability to split income between
themselves and a separately taxed business
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owners who want
limited liability and individual tax rates to apply to
business income; must be willing to meet initial and
ongoing S corporation requirements
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owners who want
limited liability and either pass-though or corporate
taxation (see below); particularly beneficial for
distributing profits in a non-proportional method to
capital contributed
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How business profits are taxed
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taxed at corporate
rates
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individual tax rates
of shareholders. no profits retained
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individual tax rates
of members, unless LLC elects corporate
taxation
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Tax-deductible fringe benefits available to
owners who work in business
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tax-deductible
fringe benefits for employee-shareholders; may fully
deduct medical insurance premiums and reimburse
employees' medical expenses
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employee shareholders owning 2% or more of stock are
restricted from corporate fringe benefits under
partnership rules
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can get benefits
associated with partnership or corporation, depending on
tax treatment of LLC
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Automatic tax status
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yes, upon filing
Articles of Incorporation with state corporate filing
office
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no; must meet
requirements and file tax election form with IRS (and
sometimes state); revoked or terminated tax status cannot
be re-elected for five years
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yes, with IRS;
unless LLC wished to elect corporation tax treatment;
most states treat LLC same as IRS for state income tax
purposes
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Are taxes due when business is
formed?
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generally not
taxable
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same as C
corporation
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generally tax-free
to set up
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