LLC vs Corporation
Formation of a limited liability company (LLC) is a much simpler process than creating a corporation and usually requires less paperwork.
LLCs are created under state law, so the process of forming one depends on the state where it is being filed. Once an LLC is formed, it is good practice to set out the roles and responsibilities of the members by creating an operating agreement to define these roles.
The Internal Revenue Service (IRS) does not view an LLC as a separate vehicle for tax purposes, which allows for greater flexibility. Members can choose how they are taxed. They can be treated as a sole proprietorship, a partnership, or a corporation.
Two types of corporations can be formed: S corporation and C corporation. An S corporation is a pass-through entity, like an LLC, where the owners are taxed on profits and losses of the corporation. A C corporation is taxed at the corporate level, separately from its owners, through a corporate income tax.
Corporations offer more flexibility when it comes to their excess profits.
What is the difference between a C-corporation and S-corporation, and which is best for a Canadian?
Canadians wanting to open a US company will undoubtedly come across the terms C-corporation (C-Corp) and S Corporation (S-corp) when researching options for setting the company in the US.
Corporations in the US are registered as either C- corporations (c-corp) or S- corporations (s-corp) and these designations are based on the corporation’s tax treatment by the U.S. Internal Revenue Code (IRS). The letters “c” and “s” refer to the subchapters in the US Internal Revenue Code regarding the taxation of corporations. In order to be treated as an S-corp, a corporation must make an election with the IRS by filing an IRS Form 2553 within a specified time period from the date of incorporation or the company’s fiscal year end. Otherwise, without a timely filed election, a corporation is by default a c-corp.
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The primary difference between an S-corp and a C-corp is the manner in which they are taxed by the IRS. A C-corp has its profits and losses stay in the business and files its own tax returns. A C-corp also pays a 21% flat tax on profit. It does not pay any tax on earnings.
With an S-corp, the profits and losses flow through to the shareholder. Shareholders can claim it on their personal tax return. Keep in mind that an LLC can be taxed as an S- corp or be taxed as a C-corp.
The other differences between an S corp and a C corp include formation and ownership. A C-corp is looked at as a default type of corporation. Articles of incorporation must be filed in your particular state. An S-corp needs to fill out this documentation in addition to filing Form 2553 to be filed with IRS right after the company formation.
When it comes to the ownership of the company, C-corps have minimal restrictions and virtually anyone can be a shareholder or owner, and there is no cap or limit on the number of owners permitted. S-corps, on the other hand cannot have more than 100 shareholders.
An S-corp election will cause a corporation to be treated for tax purposes as a flow-through entity ( like a partnership or LLC). This means that profits earned in the corporation will not be taxed at the corporate level, but instead will be deemed to flow through to the shareholders and be taxable as personal income, even if a shareholder has not actually received those monies from the corporation.
In order for a corporation to qualify as an S-corporation the corporation must have only one class of shares, and all of the shareholders must be citizens or lawful residents of the United States.
C-Corp is suitable if: There are more than one class of ownership, and/or the shareholders will include non-US persons.
S-corp is suitable if: There is only one class of owner and all shareholders are US citizens or legal residents. Also, if flow through tax treatment is required.
However, if flow through tax treatment is the priority, then a Limited Liability Company ( LLC) is a better choice for a business requiring liability protection with flow through tax treatment.