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How do limited liability companies and corporations differ?

by | Feb 4, 2015 | Business Formation & Planning

The way a Larimer County small business is structured determines how owners and shareholders are taxed. Liability issues are equally important for Colorado entrepreneurs, considering whether to form a limited liability company rather than incorporate a business.

Unlike LLCs, corporations are separate entities from the people who own, manage and invest in them. The Internal Revenue Service treats corporations or C-Corps as individual taxpayers. Consequently, a double taxation structure is created: the company pays income tax, as do people involved in the business.

LLCs are not taxed separately from the member owners. Profits and losses “flow through” the business to members, who report them on individual income tax returns. However, limited liability companies share something in common with corporations — shareholder protection against creditors and legal claims.

Corporate structures are beneficial when the goal is a large number of investors. No other business structure allows a company to issue stock. Corporate stock provides new investors and employees with a personal stake in the company’s success.

Some C-Corp businesses are further defined as Sub-S corporations. S corporation income is taxed at the shareholder level, not at the business level, as with C corporations. Taxation for Sub-S corporations is similar to LLCs, with the added benefit of the ability to issue stock.

Many features are common between C corporations and S corporations, like the inclusion of all employee-owners on the business payroll, but the business designations vary widely in other ways. For instance, the opportunity to offer fringe benefits for owner-employees is generous for C corporations but limited for Sub-S Corps.

Entity formation is a matter of choice. However, the legal structure a company takes also depends upon certain qualifications and restrictions. Tax and liability implications will play a significant role in your decision.

Business attorneys help Colorado entrepreneurs establish a foundation or restructure companies based on long-range goals, like limiting or expanding investor participation.

Source: FindLaw, “Corporation versus LLC” accessed Feb. 04, 2015

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