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What are the differences between an LLC and a company that…

What are the differences between...
What are the differences between an LLC and a company that becomes INCorporated?
Thanks
Kevin
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Answered in 2 minutes by:
1/22/2018
Roy Hadavi
Category: Business Law
Satisfied Customers: 1,293
Experience: Attorney at Law Offices of Rosenstein & Associates
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Hi. My name is ***** ***** I am a licensed attorney with extensive labor law experience. I would be happy to provide assistance. Please keep in mind that our conversation does not include an attorney-client relationship and this is for general information purposes only.

Answer: Here are some of the pros and cons of a limited liability company (LLC) versus a corporation.

LLC Pros

  • LLCs are a pass-through tax entity. Therefore, there is no issue of double taxation.
  • There are no legal formality (see corporation cons below for more information) requirements, which means it is easier to properly maintain an LLC.

LLC Cons

  • Although there is no double taxation, you are required to pay self-employment tax for your LLC.
  • LLCs are relatively new and therefore the law as it pertains to LLCs is not as well established. We do not know how the courts will treat LLCs in all instances.

Corporation Pros

  • The law is well established, we know almost exactly how the courts will treat a corporation.
  • Many vendors and customers value the name of a corporation over an LLC. There is no legal reason, but it does exist.
  • There is no self-employment tax and you may even avoid double taxation by electing to be taxed under subchapter S of the Internal Revenue Code (also known as an S-Corporation).

Corporation Cons

  • There is double taxation, even though you can avoid it.
  • Corporate formalities are required. This means that you need to maintain a proper corporate book and have annual minutes documenting the actions of the corporation.

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Customer reply replied 4 months ago
Roy,
The best formatted answer ever. I appreciate that.
Can you tell me a little about the "double taxation, even though you can avoid it"?
Thanks
Kevin

You are very welcome Kevin.

A corporation pays taxes on its earnings. Then when a corporation pays out profits to its shareholders the shareholders must pay taxes on those earnings as well. This is why it is referred to as double taxation. The simplest version is a 1 shareholder corporation. In this situation, legally the corporation and the shareholder are two separate entities and therefore they both pay taxes on the same earnings.

However, there are a few ways to avoid some of this double taxation.

  • In the example above, the shareholder would likely be an employee of the company. Likely the Chief Executive Officer (CEO). As the CEO he/she is entitled to a salary. You would pay income tax on the salary, but you would avoid the taxes that the shareholder would have to pay.
  • Dividends. As long as the rules of paying out dividends are followed properly, a corporation can pay its shareholders dividends.

My recommendation is, if you decide to go with a corporation, contact your accountant to formulate a plan of action for taxes and earnings.

Roy Hadavi
Category: Business Law
Satisfied Customers: 1,293
Experience: Attorney at Law Offices of Rosenstein & Associates
Verified
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Thank you so much for the 5-star rating! I know rating takes an additional step and I truly appreciate you taking the extra time! It's been my honor and privilege to help you with this. If I can help you in any way in the future, I'll be happy to help. For easy access, my bookmark is: https://www.justanswer.com/law/expert-royhadavi/ Or, simply request “Roy only” in the first line of your question.

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