Is an LLC a corporation? What is the difference?
LLC is a limited liability company. Corporation can be either a C Corporation or a Sub-chapter S Corporation. Both LLCs and Corporations are legal entity structures. They provide limited liability protection and protect the owners/shareholders from being personally liable to business debts.
The main differences between LLCs and C /S Corporation are as follows :
- Business Losses : Single member LLCs are considered as sole proprietors, multi-member LLCs are considered as partnerships for tax purposes. Therefore, any profits and losses pass through the owners.
- C corporations can only offset losses against profits generated.
- S Corporations can only offset against their share of profits. There are separate rules relating to stock basis and ‘at risk limitation’, so consult a tax professional if your share of S corporation losses exceed your stock basis.
- Self-employment taxes : LLC owners are subject to self-employment taxes of 15.3% unless they make an election to be treated as a corporation for tax purposes. There are no self-employment taxes for C Corporation. According to the new 2018 tax law the tax rate is 21%. S Corporation can take an additional 20% deduction on profits under the new 2018 tax law.
- Ownership rules : S Corporations have special rules. They cannot have non-residents as S Corporation owners, cannot have more than 100 owners. S Corporations again cannot be owned by C Corporations, LLCs or other S Corporations.
- Dividends : C corporations can declare dividends which can be granted to their shareholders. LLCs on the other hand are pass through entities. Therefore, all profits directly pass through the owners tax returns.
- Earnings : C Corporations can retain accumulated earnings while LLCs have pass through profits that are taxed.
- Lesser compliance : LLCs have lesser compliance rules as compared to Corporations. They are also easier to form and maintain as compared to corporations. State compliance rules may vary.
*** We only provide tax consultation and assist with business formations. We do not provide legal consultation, we will refer you to attorneys in our business network if you require services of an attorney.