1 Answer

By law, a corporation is a separate entity that has its own rights and responsibilities. In forming a corporation, potential shareholders offer money and/or property in exchange for stock.

Advantages of a corporation include limited liability for stockholders, unlimited life for the business, relative ease in raising capital, simple transfer of ownership through the sale of stock and tax-free benefits to the owner/employees.

Disadvantages of a corporation include complexity, limitations on activities by the corporate charter, extensive regulation and record-keeping rules, and double taxation, once on corporate profits and again on dividends.

Subchapter S Corporations avoid that last issue. Shareholders include their shares of income, deduction loss, and credit as part of their personal income and are not subject to self-employment tax as in a partnership. Disadvantages include less flexibility in choosing a tax year, less flexibility in who can be a shareholder, contribution limits to a retirement plan and fringe benefits taxable to employee shareholders who own more than 2 percent of the corporation.

A Limited Liability Company (LLC) is created and regulated under state laws. An LLC is allowed to possess the limited liability characteristics of a corporation, but is treated as a partnership for federal tax purposes. A major advantage to an LLC is the same tax pass-through feature of an S Corporation. Furthermore, they offer the flexibility of a partnership without the restrictions of an S Corporation. They can have more than one class of stock, the number and type of members are not limited and there is flexibility in profit/loss allocation.

They also offer limited liability protection for all members. Any LLC member can participate in management without being exposed to personal liability. Contribution of property to an LLC is tax-free regardless of how much control the contributing partner has. Liquidation of an LLC is generally a tax-free event, and they are not required to file annual reports with Arizona Corporation Commission.

Disadvantages are that an LLC must have two members to file as a partnership for federal tax purposes (a single-member LLC files as a sole proprietor), earnings are generally subject to self-employment tax, state law may limit the life of an LLC, conversion of an existing business to LLC status could result in tax recognition on appreciated assets, and fringe benefits to partners are taxable.

Also, there is a lack of uniformity in LLC statutes between states. A firm operating in more than one state may not get consistent treatment.
Source(s):
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