If the time has come to register your company, it’s important to decide whether incorporation or forming an LLC will give your business more benefits.
Advantages of Incorporation vs. Forming a Limited Liability Company (LLC)
The profits earned by a corporation are not taxed for social security or Medicare. Profits and salaries of LLCs are charged self-employment taxes, unless you opt for being taxed under corporation rules. In a corporation, salaries but not profits are subject to these taxes.
Corporations may offer your business a greater variety of benefits and fewer taxes. Fringe benefit plans are more common in corporations than in other business entities. Stock option and retirement plans are available for corporations.
S corps partners and sole proprietors have to pay taxes on any fringe benefits. This includes medical insurance premiums and group term life insurance. Shareholders and employees of a C corporation are not required to pay taxes on this type of benefits.
Taxes on Corporations Are Lower with Income Shifting
Although C corps may be subject to double taxation, this type of corporation can utilize income shifting to allow the use of lower brackets for income taxes.
For example, if your company earns $100,000, and is a sole proprietorship, you may fall in a 25% bracket for income taxes. In a corporation, you could take $50,000 as salary and then leave $50,000 within your corporation, as profit. Your federal income tax for corporations is 15% on the initial $50,000. You would also be in a 15% tax bracket for your personal income taxes. This will reduce your overall liability to the IRS.
Advantages of Limited Liability companies (LLCs) vs. Incorporation
LLCs generally have fewer formalities than corporations do. Corporations have to hold regular board meetings, with written minutes. Managers and members of LLCs do not have to hold meetings. This cuts down on time, paperwork and complications.
LLCs do not have ownership restrictions. An S corporation can’t have over 100 members, and each shareholder must be a US citizen or resident. S corp shares are also hard to place into living trusts. These particular restrictions are not applied to C corps.
LLCs can deduct their operating losses. Active participating members in the business of an LLC can deduct operating losses on their regular income taxes. S corp shareholders may deduct operating losses, but C corp shareholders cannot.
LLCs have more tax flexibility
LLCs are known as “pass through” entities for IRS purposes. This is much like partnerships and sole proprietorships. LLCs can also choose to be treated like corporations for the purposes of taxation, whether they are an S corp or a C corp. Delaware LLCs may pay even less and be allowed more deductions.
Click here to visit USA Corporate Services, Inc., which helps business owners determine which business structure works best for them and then complete the incorporation process.
Advantages of Incorporation vs. Forming a Limited Liability Company (LLC)
The profits earned by a corporation are not taxed for social security or Medicare. Profits and salaries of LLCs are charged self-employment taxes, unless you opt for being taxed under corporation rules. In a corporation, salaries but not profits are subject to these taxes.
Corporations may offer your business a greater variety of benefits and fewer taxes. Fringe benefit plans are more common in corporations than in other business entities. Stock option and retirement plans are available for corporations.
S corps partners and sole proprietors have to pay taxes on any fringe benefits. This includes medical insurance premiums and group term life insurance. Shareholders and employees of a C corporation are not required to pay taxes on this type of benefits.
Taxes on Corporations Are Lower with Income Shifting
Although C corps may be subject to double taxation, this type of corporation can utilize income shifting to allow the use of lower brackets for income taxes.
For example, if your company earns $100,000, and is a sole proprietorship, you may fall in a 25% bracket for income taxes. In a corporation, you could take $50,000 as salary and then leave $50,000 within your corporation, as profit. Your federal income tax for corporations is 15% on the initial $50,000. You would also be in a 15% tax bracket for your personal income taxes. This will reduce your overall liability to the IRS.
Advantages of Limited Liability companies (LLCs) vs. Incorporation
LLCs generally have fewer formalities than corporations do. Corporations have to hold regular board meetings, with written minutes. Managers and members of LLCs do not have to hold meetings. This cuts down on time, paperwork and complications.
LLCs do not have ownership restrictions. An S corporation can’t have over 100 members, and each shareholder must be a US citizen or resident. S corp shares are also hard to place into living trusts. These particular restrictions are not applied to C corps.
LLCs can deduct their operating losses. Active participating members in the business of an LLC can deduct operating losses on their regular income taxes. S corp shareholders may deduct operating losses, but C corp shareholders cannot.
LLCs have more tax flexibility
LLCs are known as “pass through” entities for IRS purposes. This is much like partnerships and sole proprietorships. LLCs can also choose to be treated like corporations for the purposes of taxation, whether they are an S corp or a C corp. Delaware LLCs may pay even less and be allowed more deductions.
Click here to visit USA Corporate Services, Inc., which helps business owners determine which business structure works best for them and then complete the incorporation process.