| Comparison of LLC / S. Corporation / C. Corporation |
| Issue |
LLC |
S. Corporation |
C. Corporation |
| Owners |
Unlimited number of members. Should not register in Califonia as an LLC if providing professional services. |
Limited to 100 shareholders. Cannot be foreign. Only individuals and certain trusts. |
Unlimited |
| Who pays tax? |
Income/loss flows to shareholder |
Income and loss flows to shareholder. California tax of 1.5% of net income |
C. corporation pays tax at graduated rates. Federal: 15-35% (personal service pays at 35%) California: 8.84% |
| California taxes |
$800 annual + annual fee $0 to $11,790 |
Greater of $800 minimum tax or 1.5% of net income |
Greater of $800 or 8.84% of net income |
| Suitability to hold investments |
Individuals pay tax at reduced capital gains and dividend rates |
Possible tax on net passive investment income if previously a C corporation |
Double tax on distributions – No reduced federal capital gains |
| Tax Year |
Same as members unless elect IRC 444 (maximum three month deferral) or qualify as natural business year |
Same as members unless elect IRC 444 (maximum three month deferral) or qualify as natural business year |
Generally any year except if a personal service corporation |
| Compensation |
Members are never employees. Managing and working members are subject to S/E tax on guaranteed payments and ordinary income |
Must take reasonable compensation as wages subject to payroll taxes. Net income may be subject to S/E tax for PSC |
Must take wages subject to payroll tax. Reasonable compensation issues. |
| Medical insurance and long term care |
Not deductible by LLC – above-the-line deduction for member |
Included in wages of >2% shareholder – above-the-line deduction (see IRS Notice 2008-1) |
Deductible from C. Corporation income – not included in W-2 provided insurance is nondiscriminatory (employees are covered) |
| Medical reimbursement plan |
Not available to member |
Not available to >2% shareholder |
Deductible by C. Corporation – not included in W-2 |
| Disability and life insurance |
No deduction for disability of life insurance paid for LLC member |
Disability not available to >2% shareholder; life insurance not available to S. Corporation shareholder |
Disability and up to $50,000 in premiums deductible for shareholder if employees are covered. |
| Charitable contributions |
Flow through to member |
Flow through to shareholder – up to 10% of taxable income deductible by CA corporation |
Deductible by C. Corporation – limited to 10% of taxable income |
| Capital gains and losses |
Flow through to member |
Flow through to shareholder; Treated the same as C. Corporation for California S. Corporation tax |
No reduced capital gain rate. Losses carried back three years and forward five years for federal and forward five years for California |
| Selling the entity |
Sale of membership interest is capital gain/loss. May be subject to IRC 751 ordinary treatment |
Sale of stock is capital gain/loss. May qualify for IRC 1244 loss |
Sale of stock is capital gain/loss. May qualify for IRC 1045 small business gain exclusion |
| Distributing profits |
May make unequal distributions |
Must make pro rata distributions of profits |
May have more than one class of stock so distributions not necessarily equal |
| IRC 1244 loss |
Loss on sale of LLC interest is treated as sale of capital asset limited to $3,000 current loss in excess of gains |
If qualified, individual taxpayer shareholders may claim up to $50,000 ($100,000 MFJ) as an ordinary loss in current year upon sale, exchange, or worthlessness. |
If qualified, individual taxpayer shareholders may claim up to $50,000 ($100,000 MFJ) as an ordinary loss in current year upon sale, exchange, or worthlessness. |
