What is the difference between an LLC, Conventional corp, amd S. Corp?
An LLC (Limited Liability Company), a conventional corporation, and an S Corporation (also called an S Corp) are all different types of business structures. Each of these structures has unique characteristics and advantages. Let me explain how they differ:
1. LLC (Limited Liability Company):
- Formation: To form an LLC, you need to file articles of organization with the state in which you wish to establish your company. The requirements for forming an LLC vary by state.
- Liability: One of the key advantages of an LLC is that it provides limited liability protection to its owners or members. It means that the individual members' personal assets are generally protected in case of business debts or legal liabilities.
- Taxation: By default, an LLC is a pass-through entity for tax purposes, which means that the profits and losses of the business are "passed through" to the owners or members and reported on their personal tax returns. However, an LLC can choose to be taxed as a corporation if desired.
- Flexibility: LLCs offer more organizational flexibility compared to other business structures, allowing for diverse ownership arrangements and profit-sharing agreements.
2. Conventional Corporation:
- Formation: A conventional corporation, often referred to as a C Corporation, is formed by filing articles of incorporation with the state. It requires drafting corporate bylaws and issuing shares of stock to shareholders.
- Liability: Similar to an LLC, a conventional corporation provides limited liability protection to its shareholders, ensuring that their personal assets are separate and protected from the company's debts and liabilities.
- Taxation: A C Corporation is a separate taxable entity. It pays its own taxes on the profits earned, and the shareholders are subject to individual taxation on dividends received.
- Ownership: Corporations issue shares of stock to represent ownership, making them suitable for attracting investors and raising capital through the sale of shares.
3. S Corporation:
- Formation: An S Corporation is not a separate legal entity like an LLC or a conventional corporation. Instead, it is an elected tax status for a corporation or an LLC.
- Taxation: Similar to an LLC, an S Corporation is also a pass-through entity for tax purposes. The profits and losses are passed through to the shareholders' personal tax returns, avoiding double taxation at the corporate level.
- Limitations: S Corporations have certain limitations compared to regular corporations. For example, they can have a maximum of 100 shareholders, all of whom must be U.S. citizens or residents.
- Tax Benefits: One significant advantage of an S Corporation is the potential for tax savings. Shareholders can pay themselves a reasonable salary and avoid paying self-employment taxes on the remaining profits, which can be distributed as dividends.
In summary, an LLC provides flexible ownership and limited liability protection, while a conventional corporation offers potential advantages in raising capital. An S Corporation combines the flexibility of an LLC with potential tax benefits similar to a conventional corporation. To determine the best structure for your specific business needs, it is recommended to consult with a legal or tax professional.