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The advantages and disadvantages largely depend on what you want to do. If you let me know what the business will do, I can be much more specific.
A C-corporation is a separate legal entity, as all three are, that affords the shareholders a large degree of protection. The most that they can lose is their investment in the shares. C-Corporations (and S-Corporations) have an unlimited lifetime - their lives do not depend on the lives of the shareholders. The shares are easily transferable. The management tends to be centralized with the officers of the corporation.
A C-corporation will have two layers of taxation. The C-corporation will be paying Federal and State income tax on its earnings at up to 35% for Federal. When the C-corporation then pays out its earnings to the shareholders, they again will pay tax. Generally, if the dividends are paid out of earnings, the tax rate on these dividends would be 15% or 20% for 2013 and after. So, if a corporation made $100 of profit, they would pay $35 in Federal tax, leaving $65 for dividends. If they paid the $65 as a dividend, there could be another $13 in Federal tax based on the shareholders, for total tax of over $48 for Federal.
An S-Corporation also is a separate legal entity. It has a few requirements that must be met, but it removes the second tax on dividends, and allows a lower level of taxation. S-Corporations can only have 100 shareholders (an election can be made to have husbands and wives counted as one to allow more shareholders). All of the shareholders must be US persons. In general, trusts, other corporations, LLC's, partnerships, and other entities cannot own an S-Corp. The only exception is that an S-Corp can own 100% of another S-Corp. As such, the options for ownership restrict their use. If you have a non-US citizen or resident alien, they cannot be an owner. Likewise, partnerships or large numbers of shareholders will work. However, in my opinion, if you are a small company, with all US persons owning it, an S-corp is the best way to go.
In exchange for these small restrictions on ownership, the Corporation is allowed to act as if it does not exist for Federal tax purposes. It does file its own Form 1120S tax return, but the income or loss is passed directly through to the shareholder's personal tax return, eliminating the Federal level of taxation. At the shareholder level, only income tax is paid on the earnings. Social security tax is only paid on wages that the shareholders pay themselves.
An LLC is, in my opinion generally the worst kind of entity. If the LLC has only one owner, it is considered a disregarded entity. That means that it will report the income on either Schedule C or E, depending on what the LLC does. If there are two or more owners, the income is taxed as a partnership. As such, all of its earnings are subject to self-employment tax (Social Security tax) at a rate of 15.3%. Like an S-Corp, the income or loss flows through to the shareholders' personal income tax returns.
One big disadvantage that I see with an LLC over an S-Corp is that LLCs have been around for so short a period of time. Here in Illinois, they have been legal since 1998, or only 15 years. If I am going to enter into a transaction, I want to know how it will end up. With a LLC, I only have 15 years of case law to consult. With an S-Corp, I have over a hundred years of case law to look at to see how my transaction will end up. I don't have to worry about some judge with a political agenda determining the outcome of my case!
Another advantage is that, while attorneys love LLCs, it is because they can make so much more in fees organizing them. Here in Illinois, I usually charge $750 to incorporate a company. A person can easily do it themselves for less. However, attorneys around here charge $2000 - $5000 to set up an LLC. I just do not see the advantage, except in certain circumstances. I have a client with a Polish partner that owns the LLC with him. They can not use an S-corp because one of the owners is not a US person. So in this case, an LLC works. Short of that, I do not like them.
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