Comparison of LLC / S. Corporation / C. Corporation

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.