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hey this is attorney elizabeth potts weinstein and today we're going to talk about the differences between llcs s corporations and c corporations and how to tell what's the right business entity for your business before we get into the differences between those three different type of entities it's important to understand that there's actually only two different type of entities that we're talking about llcs and corporations this is because there are two different considerations that we're going to be discussing one is the legal entity llcs or corporations and the other is how it will be taxed the tax status of your business so you can have an llc that is taxed as either a sole proprietorship or partnership depending if you it's one owner or multiple owners an llc that's taxed as an s corp or an llc that's taxed as a c corp and then you can have a corporation that's taxed as an s corp or c corp so you can see it's a lot of different combinations you can have and that's why we're going to split this up into talking about the legal entities llc's and corporations and the tax statuses whether or not you want to be just a pass-through tax entity like a sole proprietorship or partnership you want to be taxed as an s-corp or taxed as a c-corp when you're looking at llc's limited liability companies versus corporations the first thing you want to look at is the practical consideration how much is it going to cost to set that up in your state or the state in where you want to form it in some places the filing fees between an llc and a corporation are huge some places you have to do publishing of an llc and that's thousands of dollars in some places they pay different state franchise fee taxes there's a lot of differences that are purely logistical and you want to look at your state or the state where you want to form your business entity to see if we're talking about the same fees or thousands of dollars of different fees next you need to look at the owner and what is your status if you want to be taxed as an s-corporation the business owner has to either be a us citizen or have a green card there's also some other requirements too but a business that has an owner who's not a citizen doesn't have a green card can be an llc that's taxed as a partnership so you have to look at the owners to see what's even possible for you before you go ahead and form an entity and then need to switch later the third aspect is looking at your goals so for example do you want to raise money you want to bring in investors and you want those investors to be passive investors it may make sense to form a corporation that you can have a bsc corporation so you can have different classes of shares versus an s corporation you might want to form an llc with investors if the investor is someone you personally know you're just going to have one or two investors but if you're looking to pitch vc you probably want to go with a corporation i forgot one important distinction between llcs and corporations and that is llcs have more simple corporate formalities all entities have some formalities you have to observe such as keeping everything separate your finances separate your personal finances separate from the llc or the corporation's finances but corporations have more corporate formalities including having annual director and shareholder meetings with minutes and if you don't do that then you might have trouble maintaining the status of your corporation as a separate entity a fourth aspect is just your familiarity and comfort level for these types of entities i have some clients where they create corporations because they've had corporations before they know how to do all the paperwork they're very familiar with it and so you want to look at the practical aspect of you and you're the one who has to maintain this llc or corporation over the years what are you going to be comfortable doing and the fifth aspect to think about is the type of business you have some businesses can only be llc's and not corporations or the other way around for example as an attorney in california i had to form a corporation because attorneys are not allowed to be llc's and that's true of professionals in many states many states don't allow them to perform llc's but some do the other aspect is certain kinds of businesses are traditionally formed as llc's or even llps liability partnerships which i'll talk about some other time because it just makes more sense for the kind of business they have they can structure it in a much easier way for example real estate investing businesses tend to be llc's or llps instead of corporations the next aspect is to look at the tax status so you formed an llc or a corporation how would you want it to be taxed if you have a llc and you want it to just have the default tax status that means it's going to be taxed as a sole proprietorship if you're only one person or a partnership if there's multiple people who own it the great part about that it's the default you don't really have to do anything it's relatively straightforward you can take the any losses from that business and apply it against your other income in some situations if you're an active participant in that business and that can be really helpful in the early years of a business if it's having losses at the end of the year but one of the problems of that is if you have profits in at the end of the year and you don't distribute it to the owners you still owe taxes on it and that can be very very frustrating one of the ways to solve that is to do a minimal distribution just to pay taxes but that's something you'll have to calculate at the end of the year another great aspect is the taxes are comparatively simple if you're taxed as a sole proprietorship if you're one owner because it can just be on your schedule c of your 1040 form and that can be something you do yourself or you use commonly available software if your business is an llc or corporation it can be taxed as an s corporation there are limitations on what kinds of businesses can be taxed as an s corporation based upon the status of their owners and i talked a little bit about that before but if you are able to claim s-corporation status this can be a great way to pay less taxes on the profits of your business so for example my business my law firm is organized as a corporation that's taxed as an s corp when i pay myself i can pay myself in two different ways one way is a salary and i pay myself a salary every week just like when i pay my other employees and when you pay yourself a salary as a paycheck you're going to have you know ficas and security all that stuff come taking out of it but i can also do distributions of the profit distributions of the profit is taxed differently specifically you don't have to pay self-employment income taxes on it so can reduce your tax burden but you can't pay just the profits to yourself as a distribution and not pay yourself a salary the irs knows that you want to do that and so you have to pay yourself a legit salary if you're working in the business another aspect of having an llc or corporation taxed as a
Thanks for your comment Roland Henington, have a nice day.
- Cordell Starowicz, Staff Member
in this video I'm gonna explain the difference between a sole-proprietorship and I'll see and a corporation from both a legal and tax perspective my name is Navi Mirage I'm a certified public accountant and we've got a lot to cover so let's get into the video all right so no matter where you're watching this video whether it's on your various social media platforms you can always find this video on my website which is Navi Mirage CPA com a quick disclaimer before we get into the details I am NOT an attorney however I am a certified public accountant so I can speak to the tax implications of setting up these various legal entities but I have consulted with attorneys across the nation and I'm pretty sure they would agree with most of the things that I might touch on from a legal perspective but you would want to consult with your business attorney to see if they agree with what I'm saying here so as I mentioned when you form a business you are actually making two decisions you are making a legal decision and a tax is decision so let me kind of lay the foundation for this video and that will kind of make a little bit more sense so when you form a business you are going to be treated as the ways up above here from a legal perspective and then down here are the different ways you could be treated from a tax perspective all right so up here I have the different legal entity types and down below the different tax types let's talk about the colors for a second the green is going to indicate how this particular entity is taxed by default what I mean by that is you know there's no box that says hey check here to be treated this way this way from a tax perspective the blue represents how that entity type could be treated from a tax perspective and I'll get into those details here in a second now there are some less common structures that I didn't put on here and you can also have an LLC treated as a c-corp but that's not very common and this video is for your average small business owner so let's get into the details so the sole proprietorship you can form a sole proprietorship by simply walking into your bank and if your name is John Doe for example you could talk to your banker and he or she will open up an account call john doe's landscaping if you're in the landscaper and you could just go out and start mowing people's lawns if you want now I don't necessarily recommend that because that the sole proprietorship doesn't have what's called limited liability protection so if someone Sue's your you know john doe's landscaping your individual assets as john doe the individual are also now at risk okay so how is this entity treated the sole proprietorship treated from a tax perspective well its treated as a sole proprietorship but what I mean by that is you are going to complete you or your tax professional is going to complete a Schedule C and attach it to your form 1040 individual tax return what I want to help you understand is that there's no separate set of tax documents that you're completing or having your accountant complete when you form our sole proprietorship it's an additional Schedule called Schedule C that's attached to your individual tax return now let's for a brief moment talk about these entity structures on the right-hand side so I mentioned that the sole proprietorship does not provide limited liability protection these entity types may and I say me because you want to treat them as though they're separate entities so you don't want to come in commingled funds between your business and personal you want to use your entity name on all your marketing documents you might if you're an LLC have a articles of organization of course but also an operating agreement maybe you have a Board of Advisors you take meeting minutes when you have business discussions even if it's by yourself I know that sounds a little silly but yes you want to record meeting minutes and all those things will help you you know prop up and support that yes your LLC is actually different than you as an individual but let's kind of break these down one by one so here I have SM l ec LLC rather or s MP LLC this means that s M stands for single-member so you're a one-man shop if you will and how this is treated is by default is as a sole proprietorship so it's exactly the same as this entity type the sole proprietorship so you are simply adding Schedule C to your individual tax return a single-member LLC by default is taxed the exact same way a sole proprietorship all it does is give you that limited liability protection let's move on oh briefly let's touch on the P LLC so a lot of you are probably like what is this P LLC I've never heard of it P LLC stands for professional limited liability company so who should be forming a PLLC someone who holds a license with the state that they're forming the entity in most of your states across the nation support a plc so if you are a certified public accountant or an attorney or a physician or a realtor or maybe a general contractor holds a license you should be forming a professional limited liability company if it's available in your state all right moving on mmm LLC that stands for a multi-member LLC the owners of an LLC are called members now the default tax classification for a multi-member LLC is a partnership and so you would file a separate set of tax documents call its form 1065 and that's the tax return a partnership completes or your account would complete for you there's no sort of I mentioned this a moment ago there's no check the box when you're forming your multi-member LLC for you to know that hey it's going to get treated this way from a tax perspective this is just information that your accountant should advising you on and let's touch on the c-corporation a lot of you might have heard this this is your you know Amazon's of the world or C corporations but if you are a professional just like I mentioned here the P LLC if you're a professional and forming a C corporation you're a corporation is actually called a professional association so again your attorney your realtor let me touch on the Realtors for a second many Realtors have some you know top producers in their office who have pas but you know the corporations have been around and existence much longer than the LLC's have and that's why they may be doing so it may not be right for you you might prematurely create a PA if you're if you don't have a conversation with your attorney or CPA so how is the corporation treated for tax purposes well it's subject to double taxation which means that the profits from the corporation are going to pay tax when they form file file form 1120 and then the shareholders the owners of a C corporation our cars are called shareholders and they will then again pay tax when they receive distributions from the C corporation or the professional association so how can these entities be treated as S corporation so quick point I want to make is you can't go to your state and say I want to form an S corporation these are the entity types that you would form with your state from the single-member LLC on this way I mentioned that the
Thanks Carmella your participation is very much appreciated
- Cordell Starowicz
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I've studied femtochemistry at San Francisco State University in San Francisco and I am an expert in civil engineering. I usually feel optimistic. My previous job was personnel recruiter I held this position for 13 years, I love talking about reviewing gadgets and hula hooping. Huge fan of Sienna Miller I practice softball and collect chemical elements.
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