Corporation vs. LLC: Which should I choose for my business

Posted March 20, 2015

incvsllc01bTHIS COMPARISON of Limited Liability Company (“LLC”) versus Corporations (S or C) is intended to address a typical startup of a small business organization.

Corporation Advantages

♦ May elect a non-calendar fiscal year, providing opportunities for shareholders to accelerate or delay recognition of income (C corporations only).

♦ Is the only limited liability organization that is available to most licensed professionals in California (including dentists and doctors).

♦ May obtain significant tax benefits not available to LLC (S corporation and C corporation have different benefits; see C corporations vs S Corporations for details).

♦ No income tax owed by shareholders of insolvent corporation for “cancellation of debt” (solvent LLC members of insolvent LLCs are generally taxed on the amount of bad debt cancelled).

LLC Advantages

♦ Creditors of members cannot seize membership interests (and thus take some management control to force extra distributions), but can only attach earnings of the member/debtor as previously authorized by the LLC.   [Comparison: Creditors of shareholders, who can attach shares as collateral for security agreements under Article 9 of the Uniform Commercial Code].

♦ Less annual paperwork (no annual minutes required, and no separate LLC tax return required for a one person LLC).

♦ More freedom to creatively arrange differential capital contributions, profit distributions, loss allocations, preferential payments and voting arrangements between owners.

♦ Fewer limitations and burdens on trust ownership of LLC (dangers exist for trust ownership of S corporation).

♦ Loans personally guaranteed by members are added to basis, so if significant losses are anticipated those increased losses may be claimed as an additional tax deduction.

This comparison is not exhaustive, nor does it apply necessarily in each and every circumstance.   The contents of this website are not intended to be, nor shall they be considered, legal advice or legal opinions. Please see your attorney and/or certified public accountant for more thorough coverage of the subject.

This information is not intended to be used nor can it be used for purposes of avoiding tax penalties or promoting, marketing or recommending to another party any transaction or matter addressed above.

Christopher Shenfield, Esq., Burlingame, California, March 20, 2015