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The following information is intended as a guide only to assist you and your tax professional in determining the type of entity you wish to form.
Remember to consult your attorney or accountant.
Many of our customers inquire about the tax differences among C and S corporations and LLC's. Please remember that the differences in the following table represent tax differences and do not relate to operational differences. Each form of business listed here gives its owners limited liability from the Corporation or LLC's creditors. Limited liability means generally that the person's liability for the entity's debts is limited to the loss of the investment already made, and no more. Unless special circumstances exist, owners are generally not personally liable for the debts of the entity. We believe that the information contained in the following chart is accurate, however it is no substitute for good legal or accounting advice.
COMPARISON OF 'C' CORPs, 'S' CORPs AND LLC'S
Note: In the comparisons below, references for Subchapter-S Corporations are after the Small Business Job Protection Act. References for LLC formation are after finalization of Check-The-Box Regulations.
Number of Owners Allowed
Subchapter-C Corporation: Unlimited
Subchapter-S Corporation: No more than 75
LLC: Unlimited
Restrictions on Ownership
Subchapter-C Corporation: Generally none
Subchapter-S Corporation: Numerous restriction including prohibitions on ownership
by non-residents, corporations and certain trusts.
LLC: None
Flexibility in Owning Subsidiaries
Subchapter-C Corporation: None
Subchapter-S Corporation: Cannot be owned by a C corp. Cannot be owned by a
S corporation unless as a 100% subsidiary.
LLC: Unlimited
Flexibility of Financial Structure
Subchapter-C Corporation: Unlimited
Subchapter-S Corporation: Limited to one class of stock but can have voting and
non-voting
LLC: Unlimited
Chance of Inadvertent Termination of 'S' Status or Partnership Tax Status
Subchapter-C Corporation: N/A
Subchapter-S Corporation: Problem. Several events can result in loss of status.
LLC: None unless an election is filed.
Flexibility of Tax Allocations
Subchapter-C Corporation: None
Subchapter-S Corporation: Distributive share must be pro-rated to stock ownership.
LLC: Must pass the substantial economic effect under sec. 704(d)
Tax of Gains on Contribution to Entity
Subchapter-C Corporation: No gain recognized.
Subchapter-S Corporation: Must meet 80% ownership requirements of sec. 351.
Gain is recognized under sec. 357 if debt exceeds basis of property.
LLC: No gain recognized under sec. 721.
Basis Adjustment if Shareholder/Member Guarantees Debt
Subchapter-C Corporation: No basis increase unless the guarantor actually makes
payment.
Subchapter-S Corporation: No basis increase unless the guarantor actually makes
payment.
LLC: Guarantee increases basis so long as member does not have right of
reimbursement.
Distribution of Appreciated Assets
Subchapter-C Corporation: Corporation recognizes gain on distribution. Sec.311(b)(1)
Subchapter-S Corporation: Corporation recognizes gain on distribution. Sec.311(b)(1)
LLC: Generally, no gain is recognized by either LLC or members.
Step-Up of Basis on Purchase
Subchapter-C Corporation: Shareholder takes cost basis of shares purchased.
Corp.'s basis remains unchanged.
Subchapter-S Corporation: Shareholder takes cost basis of shares purchased.
Corp.'s basis remains unchanged.
LLC: New member takes cost basis of interest purchased. LLC may elect to step up
basis of assets.
Step-Up of Basis on Death
Subchapter-C Corporation: Basis of stock is stepped-up, however basis of assets in
corporation are not.
Subchapter-S Corporation: Basis of stock is stepped-up, however basis of assets in
corporation are not.
LLC: Basis of interest is stepped-up. Co. may elect to also step up basis in assets.
Creditor Protection
Subchapter-C Corporation: None, stock may be seized by stockholder's creditor.
Shareholder generally is not personally liable for corp. debt.
Subchapter-S Corporation: None, stock may be seized by stockholder's creditor.
Shareholder generally is not personally liable for corp. debt.
LLC: None, interest may be seized by member's creditor. Operating agreement may limit
creditor rights to become a member. Member is generally not personally liable for
company debts.
Employment Taxes
Subchapter-C Corporation: Dividends are not subject to employment taxes.
Subchapter-S Corporation: Distributive share is generally not subject to
self-employment taxes.
LLC: Distributions are generally subject to self-employment taxes except for passive
members of an LLC with centralized management.
Remember to consult your attorney or accountant.
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