A business owner has a choice to operate his or her business as a sole proprietorship, general partnership, limited partnership, a C or S corporation or a limited liability company (“LLC”).
While the default structure is a sole proprietorship, a sole proprietor is personally liable for all of the debts and liabilities of the business. This risk alone should cause most business owners to use a separate legal entity.
The choice of entity decision is one that really depends on the facts and circumstances of each business and its owners. Accordingly, we cannot provide you advice on which entity is proper for you.
The chart below provides a summary comparison of LLCs, S Corporations and C Corporations in order to help you decide on which entity is best for your business.
| LLC | S Corporation | C Corporation | |
|---|---|---|---|
| Limited Liability | All members have limited liability from the LLC’s debts unless they agree otherwise | All shareholders have limited liability from the corporation’s debts unless they agree otherwise | All shareholders have limited liability from the corporation’s debts unless they agree otherwise |
| Levels of Federal Income Taxation | One | One (in certain situations if the S Corporation converted from a C corporation, there are two levels). All income of LLC flows through and is taxed to its members | Two. Entity level tax and tax on dividend distributions |
| Number of Owners | No restrictions but at least two members are required to be considered a partnership for tax purposes (a single member is disregarded for tax purposes only) | 1 to 100 | No restrictions |
| Type of Owners | Any | Owners must be individuals or certain trusts and must be US citizens or residents | Any |
| Classes of Ownership Interests | Multiple classes are permitted | Only one class of stock is permitted. However, you can have preferred and common stock | Multiple classes are permitted |
| Tax Year | Generally calendar | Generally calendar | No restrictions |
| Filing Fees | TX filing fee and online processing fees: $300 | TX filing fee and online processing fees: $300 | TX filing fee and online processing fees: $300 |
| Management | Can be either Member managed or Manager managed | Board of Directors and Officers | Board of Directors and Officers |
| Self Employment Tax | Generally all LLC income up to $102,000 is subject to 15.3% self employment tax; any amount in excess of $102,000 is subject to 2.9% Medicare tax. There are some deductions for tax. | Only income paid to owners are subject to the 15.3% self employment tax. Profits and Distributions are not. Compensation must be reasonable. | Owner employees are subject to FICA and other taxes applied to any employee. Dividends are not subject to self employment tax |
| Deduction of Losses | Losses may be taken on member’s tax return up to his tax basis in his LLC interest | Losses may be taken on shareholder’s tax return up to his tax basis in his stock | Shareholders cannot get tax deduction benefit of corporation losses. Corporations can carryover losses to succeeding tax years. |
| Incentive Stock Option Plan | Can have option plan but not tax advantage options (known as incentive stock options) | Can have option plan but not tax advantage options (known as incentive stock options) | Corporations can offer employees certain tax advantage options known as incentive stock options |
| Medical Plan, Health and Other Benefits for Employees | Some benefits with limitations | Some benefits with limitations | Corporations can deduct 100% of health insurance premiums and offer tax advantaged medical savings accounts. |