Why Choose An C Corporation?

S Corporations and Limited Liability Corporations (LLCs) are similar in numerous ways. S Corporations are more restrictive than LLCs. S Corporations differ by the taxation, size of the corporation, the ownership, transferability, management and the duration of existence. Over 60% of companies in the United States are currently S Corporations. This type of corporation is preferred; however, preference does not always mean that this type is better.

LLCs offer tremendous latitude to its members. LLCs, for instance, can have an unlimited number of members, and the members split the profits and losses based upon a percentage that the members decide upon. There is no Board of Directors that the members must report to for advisement. The members simply come to an agreement, and they are taxed on the percentage of income or loss that each member decided. Some members may have more involvement and therefore, may deserve to take a larger responsibility for the outcome of the company whether it is profitable or not.

S Corporations, on the other hand, are limited to 100 shareholders. Each are given an equal share in the company, typically. These shareholders operate through the advisement of a Board of Directors. If the company suffers a loss or profit, each shareholder reports the profit or loss on their individual tax returns. Self employment taxes are not required of S Corporations. This amount typically amounts to 15% after Social Security and Medicare are deducted. LLCs will, however, be required to pay self employment taxes on all of their income. S Corporations only pay on what is considered as reasonable salary.

When considering whether to become an S Corporation or an LLC, the decision primarily becomes whether your company would like to sacrifice some freedoms for a few more tax breaks. Both LLCs and S Corporations must file an annual report through the Secretary of State, and a statement of formation must be issued 90 days after formation. Therefore, no difference is reported in this instance. However, S Corporations are required to file an annual income tax return through shareholders and extensive documentation is required.

For instance, S corporations may require annual meetings, minutes, bylaws and stock issuance. LLCs do not require any of these items necessarily. Though, they may include some of these items to organize and structure their business which most of them now use an online paycheck stub template. Both the S Corporation and LLC will protect their shareholders or members from extensive company debts or lawsuits. So, this is not a decision maker or breaker.

The unique feature of S Corporations is that they may raise capital for the company through stock. Stock may also be a part of the shareholders basis. Basis is the amount of allowable income that shareholders make from the profit of the company that is not subject to a capital gains tax. Anything over the basis is subject to the capital gains tax. LLC businesses do not have the luxury of raising capital through stock. All of their earnings are based upon profit from sales of the product, service or other means.

A shareholder in an S Corporation may sell his or her interest in the company at any time without the agreement of the Board of Directors or other shareholders. LLC members must first consult with the other members of the organization before a sale. S Corporations have an advantage from a shareholder perspective, because they have more freedom to sell at any time.

When deciding whether an S Corporation or a LLC is more advantageous, it would be a matter of preference in most instances. Companies with a global presence may be better off with an LLC rather than an S Corporation, which limits the company to the United States.