LLC vs S Corp vs C Corp | Which Business Entity Should I Choose

hey this is attorney elizabeth potts weinstein and today we're going to talk about the differences between llcs s corporations and c corporations and how to tell what's the right business entity for your business before we get into the differences between those three different type of entities it's important to understand that there's actually only two different type of entities that we're talking about llcs and corporations this is because there are two different considerations that we're going to be discussing one is the legal entity llcs or corporations and the other is how it will be taxed the tax status of your business so you can have an llc that is taxed as either a sole proprietorship or partnership depending if you it's one owner or multiple owners an llc that's taxed as an s corp or an llc that's taxed as a c corp and then you can have a corporation that's taxed as an s corp or c corp so you can see it's a lot of different combinations you can have and that's why we're going to split this up into talking about the legal entities llc's and corporations and the tax statuses whether or not you want to be just a pass-through tax entity like a sole proprietorship or partnership you want to be taxed as an s-corp or taxed as a c-corp [Music] when you're looking at llc's limited liability companies versus corporations the first thing you want to look at is the practical consideration how much is it going to cost to set that up in your state or the state in where you want to form it in some places the filing fees between an llc and a corporation are huge some places you have to do publishing of an llc and that's thousands of dollars in some places they pay different state franchise fee taxes there's a lot of differences that are purely logistical and you want to look at your state or the state where you want to form your business entity to see if we're talking about the same fees or thousands of dollars of different fees next you need to look at the owner and what is your status if you want to be taxed as an s-corporation the business owner has to either be a us citizen or have a green card there's also some other requirements too but a business that has an owner who's not a citizen doesn't have a green card can be an llc that's taxed as a partnership so you have to look at the owners to see what's even possible for you before you go ahead and form an entity and then need to switch later the third aspect is looking at your goals so for example do you want to raise money you want to bring in investors and you want those investors to be passive investors it may make sense to form a corporation that you can have a bsc corporation so you can have different classes of shares versus an s corporation you might want to form an llc with investors if the investor is someone you personally know you're just going to have one or two investors but if you're looking to pitch vc you probably want to go with a corporation i forgot one important distinction between llcs and corporations and that is llcs have more simple corporate formalities all entities have some formalities you have to observe such as keeping everything separate your finances separate your personal finances separate from the llc or the corporation's finances but corporations have more corporate formalities including having annual director and shareholder meetings with minutes and if you don't do that then you might have trouble maintaining the status of your corporation as a separate entity a fourth aspect is just your familiarity and comfort level for these types of entities i have some clients where they create corporations because they've had corporations before they know how to do all the paperwork they're very familiar with it and so you want to look at the practical aspect of you and you're the one who has to maintain this llc or corporation over the years what are you going to be comfortable doing and the fifth aspect to think about is the type of business you have some businesses can only be llc's and not corporations or the other way around for example as an attorney in california i had to form a corporation because attorneys are not allowed to be llc's and that's true of professionals in many states many states don't allow them to perform llc's but some do the other aspect is certain kinds of businesses are traditionally formed as llc's or even llps liability partnerships which i'll talk about some other time because it just makes more sense for the kind of business they have they can structure it in a much easier way for example real estate investing businesses tend to be llc's or llps instead of corporations [Music] the next aspect is to look at the tax status so you formed an llc or a corporation how would you want it to be taxed if you have a llc and you want it to just have the default tax status that means it's going to be taxed as a sole proprietorship if you're only one person or a partnership if there's multiple people who own it the great part about that it's the default you don't really have to do anything it's relatively straightforward you can take the any losses from that business and apply it against your other income in some situations if you're an active participant in that business and that can be really helpful in the early years of a business if it's having losses at the end of the year but one of the problems of that is if you have profits in at the end of the year and you don't distribute it to the owners you still owe taxes on it and that can be very very frustrating one of the ways to solve that is to do a minimal distribution just to pay taxes but that's something you'll have to calculate at the end of the year another great aspect is the taxes are comparatively simple if you're taxed as a sole proprietorship if you're one owner because it can just be on your schedule c of your 1040 form and that can be something you do yourself or you use commonly available software if your business is an llc or corporation it can be taxed as an s corporation there are limitations on what kinds of businesses can be taxed as an s corporation based upon the status of their owners and i talked a little bit about that before but if you are able to claim s-corporation status this can be a great way to pay less taxes on the profits of your business so for example my business my law firm is organized as a corporation that's taxed as an s corp when i pay myself i can pay myself in two different ways one way is a salary and i pay myself a salary every week just like when i pay my other employees and when you pay yourself a salary as a paycheck you're going to have you know ficas and security all that stuff come taking out of it but i can also do distributions of the profit distributions of the profit is taxed differently specifically you don't have to pay self-employment income taxes on it so can reduce your tax burden but you can't pay just the profits to yourself as a distribution and not pay yourself a salary the irs knows that you want to do that and so you have to pay yourself a legit salary if you're working in the business another aspect of having an llc or corporation taxed as an s corp is that it can be easier to get certain benefits so for example here in the pandemic because i have a business that's formed as a corporation that has s corp tax status it was actually easier for me to apply to get loan from the government from the united states federal government than it would have been if i would had an llc with a pass-through tax entity they were still able to get benefits but they had to wait longer to apply and another great aspect of having a business that is taxed as an s corporation or really a c corporation is that it's easier to generate its own its own credit identity it is true that llc is a separate entity from you personally but i found that some banks and things don't respect it as much as they do corporations a c corporation is a tax entity that you might think of for big giant companies that's how they're taxed but even a small business can choose to be taxed as a c corp it is going to be more complicated to deal with your taxes and that's true of an s corp to some extent too also the c corp falls under double taxation and what that means is is that the corporation itself pays taxes on profits and when it distributes those profits to the owner the owner pays taxes so you can actually end up paying more taxes because you pay taxes twice but there are a lot of benefits to having a c corp one of the big benefits is that a c corporation can leave assets in the business and the owner doesn't have to pay taxes on those profits so if you have a business we're going to be reinvesting every time you make into research and development or expansion for example the owner doesn't have to pay taxes on the profits each year even though the owner doesn't get any of them because the corporation can hold on to those profits and reinvest them year after year another aspect some of my clients use is that you can have better fringe benefits as an owner and as all for all your employees as a c corporation than as an s corporation also with a c corporation you can have as many owners as you want if you're just having the owners be shareholders they own the stock for s corporation there's a limit on the number but for c corporation it can be as many shares as you distribute and so if you want to have a lot of investors passive investors who aren't really active in the business if you want to get venture capital if you want to go public someday a c corporation is probably the right choice for you eventually the bottom line is whether you should have an llc or a corporation and whether your business should be taxed as a pass-through entity like a sole proprietorship or partnership or taxed as an s-corp or tax at the c-corp really depends upon your situation your current tax burden and the goals for the future of your business again this is attorney elizabeth weinstein if you found this video helpful please hit the thumbs up button and subscribe for more legal information for small business owners and if you have any questions or comments about llc's versus s-corps versus c-corps feel free to go ahead and ask them below and i'll try to point you in the right direction thanks a lot for watching bye you

Channel: Elizabeth Potts Weinstein

Views: 30,633

Keywords: llc vs s corp vs c corp, which business entity should i choose, business entity, business structure, business structures, llc vs corporation, llc vs s corp, business entity types, corporation vs llc, business entities, s corporation vs llc, s corp vs llc tax implications, llc vs s corp (should you choose an s corp status?), business structure - choosing the right structure for your business, how to choose a business structure, formal business structures, small business

Id: M2rD-wUcCrc

Length: 12min 1sec (721 seconds)

Published: Mon Nov 23 2020