written on November 14, 2008 by James K Roosa
This is the second of a two part article discussing choice of entity for a new business. Because virtually all new business entities formed these days are either a limited liability company or a Subchapter S corporation, the following chart compares the primary characteristics of each type of entity.
Limited Liability Company
Subchapter S Corporation
- double taxation avoided
- limited personal liability
- fewer structural/hierarchy formalities (but need for Operating Agreement)
- unlimited number of members; no restrictions on membership
- can have multiple classes of stock; flexibility in distribution
- can have subsidiaries
- Perpetual existence
- earnings taxed whether or not distributed
- member files an individual tax return; multi-member LLCs also file partnership tax return
- health insurance for > 2% member is partially tax deductible
- employed member pays self-employment tax
- creditors may charge LLC interest of member/debtor (but not force a sale)
- unrestricted transferability of interests (subject to Operating Agreement)
- An LLC is owned by Members who can either serve as day-to-day managers or appoint a Manager
- double taxation avoided
- limited personal liability
- must follow state corporate law formalities (e.g., annual meeting, election of directors)
- limited to 75 members; generally, only individuals may be stockholders
- limited to one class of stock (but can have different voting rights); proportionate distributions
- can have subsidiaries
- Perpetual existence
- earnings taxed whether or not distributed
- each stockholder files an individual tax return
- Health insurance for > 2% stockholders is partially tax deductible
- employed stockholder pays Medicare, FICA, FUTA, WC, State Unemployment
- creditors may attach shares (but are subject to Stockholder Agreement)
- unrestricted transferability of interests (subject to Stockholders’ Agreement)
- A corporation is owned by Stockholders, who elect Directors, Officers handle day-to-day management