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The difference between a corporation and a limited liability company (LLC).
A corporation is owned by the shareholders, while a limited liability company is owned by the members.
Both a shareholder of a corporation and a member of an LLC can be shielded from liability when a lawsuit is filed against the company itself.
However, when a lawsuit is filed against a person, a limited liability company has asset protection so that the owner of the company can be protected from having their LLC membership taken away. Nevada has similar laws that apply to corporations. Therefore, one recommendation in most states when doing business in the form of a corporation is to own stock through an asset protection trust to help prevent the stock from being taken away in the event of a personal lawsuit.
So, imagine if your company is a brick wall. If you or one of your employees is hit by someone with a car during business hours and your business is sued for more than your insurance coverage, does that company protect you from losing your home, personal bank accounts and investments? When structured and run properly, both a corporation and an LLC can do just that.
On the other hand, if you go out to dinner on a Saturday night and the same thing happens and you are sued personally, is your business protected from being taken from you? An LLC with more than one owner or in Nevada and Wyoming a single owner LLC has provisions to protect against your business being taken over.
The leader of a corporation is among the officers and directors. In a limited liability company, these are the managers or members. The officers of a corporation, for example, are the president, secretary, treasurer, and chief executive officer.
The board members usually select and dismiss the officers of the company and are often not involved in the day-to-day operations of the company. For a limited liability company, I often prefer a manager-managed LLC because the manager of the LLC doesn't have to have any ownership and they can have 100% control if the articles of incorporation allow it. So when they are sued personally, they don't have assets to seize, they just have a position. They can be the only signatory on a bank account, they can have 100% control of the company and have little or no ownership.
The rules of a corporation are contained in the articles of incorporation. In a limited liability company, they are contained in the articles of incorporation. The articles of incorporation and articles of organization contain provisions that are not governed by law, such as when officers can be elected and when and where meetings are held. In a limited liability company, the memorandum of association is a very important document because it talks about asset protection, what happens when members are sued, how their interests are protected from being taken away in litigation, etc.
Information on defenses to lawsuits for a corporation against an LLC
Both a corporation and a limited liability company offer protection from lawsuits. So when the business side of the company is sued, the owners of a corporation or limited liability company can be protected from having a lawsuit jump over them and take away their home, their car, their bank account and everything they have worked so hard for. So, unlike a sole proprietorship or general partnership, both a corporation and an LLC can provide owners with protection from lawsuits when the business is sued.
Asset protection information for corporation vs LLC
On the other hand, asset protection is relevant when the person themselves become the subject of a lawsuit. Let's say someone is driving a car on a Saturday night and crashes into another car, the assets within the company and the company itself can be protected if it is a limited liability company. However, the stock of the corporation can be taken away from that shareholder (except for a corporation in Nevada), so again it is recommended that if someone owns stock in the corporation, that stock should be held in a trust for asset protection.
Налогообложение корпорации по сравнению с LLC
By default in the United States, a corporation, and we're talking about a for-profit corporation, is taxed as a C corporation. "C" can be thought of as an abbreviation for the word "corporation" (corporation) because a corporation pays its own income tax.
If tax form 2553 is filed, the corporation can be taxed as an S corporation. An S corporation benefits many small business owners because distributions of profits to the shareholders of an S corporation are not taxable under Social Security or Old Age Security, which is 15.3%. So when you pay a reasonable salary out of the company, then pay the rest of the money as a distribution to shareholders, for every $10,000 paid to you this way, you save $1,530 in taxes, which is a 15.3% savings to the distribution and the Type S corporation shareholders.
A limited liability company can be taxed in four ways. By default, when a limited company has a single owner, it is taxed as a sole proprietorship or disregarded entity. This means that there is no tax at the company level. The tax burden is shifted from the company to the owners, making it a great choice for real estate ownership and stock market investments because the tax deductions are passed on to the owners and there is no tax at the company level.
On the other hand, C and S corporations can only have a certain amount of passive income without significant tax penalties. When a limited liability company has two or more owners, it is taxed as a default partnership, similar to taxing a disregarded entity, the tax burden is shifted to the owners and no tax is imposed on the company's income.
If Form 8832 is properly filed, a limited liability company can be taxed as a C corporation, and the limited liability company then pays its own taxes on its income. Alternatively, if Form 2553 is filed, the LLC can be taxed as an S corporation. So there are generally two ways to tax a for-profit corporation: as an S corporation or a C corporation. And four ways to tax a limited liability company: as a disregarded entity (the default when there is one owner), a partnership (the default when there are two or more owners), and with just one or two filings, as a Type C corporation or a Type S corporation.
The myth of double taxation
Let's talk about the myth of double taxation. I call it a myth because double taxation only applies when dividends are paid. The profits that result in the dividend payment are taxed at the company level, and then when the shareholder receives the dividend, that income is taxed at the personal level. So, as my mother said, when I touched the hot stove, she said: "Son, I suggest you don't do that again." The same thing is advised for small entrepreneurs in most cases: don't pay dividends so there is no double taxation. Take Warren Buffett as an example. His company has a strict rule of not paying dividends. So, again, I call it a double taxation myth because in most cases, dividends don't have to be paid out. So pay a salary, which is a tax deduction for the corporation, a bonus, which is also a tax deduction, or an S corporation distribution to shareholders, which is also tax-free at the company level.
When to use a corporation vs an LLC
When to use a corporation or an LLC? Both a corporation and an LLC may be appropriate for running an "active" business, such as a construction company, a barber shop, an automobile sales company, or an import/export business. If you intend to take your company public and sell stock, a corporation is the right vehicle.
Now, you can use a limited liability company to hold passive investments such as real estate, stocks, etc. because the deductions pass through the company and there is no tax at the company level.
In summary, some basic differences between a corporation and an LLC have been outlined above. If you need more information, there is a phone number or form on this page that you can fill out to get more help.