LLC or Corporation? S-Corp or C-Corp? Why do I even need an official entity?

Small Business Attorneys, Mesa/ Phoenix Arizona

These are not uncommon questions for new business owners or prospective business owners.

Both Corporations and LLCs are great to minimize personal liability and gain greater credibility as a business and both have distinct advantages and disadvantages to be considered prior to forming your business. Other options exist for business formations as well, and sometimes formation as a Limited Partnership, Limited Liability Partnership or Non-Profit will be a better fit than a Corporation or a LLC.

Please consult your tax professional and independent counsel before deciding which entity is best for you.

For today, we will compare the benefits and costs of an LLC vs. a C-Corp or S-Corp.

Corporations offer personal liability protection, tax savings, and increased opportunities for raising capital, but also require Corporate formalities. After a corporation is formed it must adopt bylaws, elect a board of directors, hold initial and annual meetings complete with detailed written minutes signed by the appropriate shareholder or directors. Corporations must file annual state reports and pay annual fees, lest they risk being dissolved by the State.

A C-Corporation has no membership restrictions, profits can be spread between owners and the corporation to lower the effective tax rate. Shareholders and Directors are not typically responsible for liabilities or debts of the corporation. C-Corporations are taxed as separate entities, which can mean that earnings are taxes twice- once by the corporation and again by the shareholders.

S-Corporations are limited to 100 shareholders. S-corps provide pass through tax benefits so income and losses are passed through directly to the shareholders; there is no “double taxation.” This can be especially helpful for new businesses, which anticipate losses in the early years.

An LLC or limited liability company offer the same personal liability protection as a corporation but do not require many of the corporate formalities like bylaws, annual meetings and minutes. An LLC may elect to be taxed as a traditional corporation or as a “pass through” entity. There are no restrictions on the number of members, and are required to file annual reports just like corporations. If an LLC is a single member LLC, there is no requirement that the owner file a separate tax filing. However, please consult your tax adviser on this subject, because a growing body of tax law is requiring some single member LLCs to file separately.

In Arizona, businesses can also form as a PLLC or Professional Limited Liability Corporation. Only certain professions designated as “professional” are able to file for the PLLC and some professions like Realtors are required to file as PLLCs.

This concludes our basic discussion on Corporations and LLCs, again, please see a legal and tax professional when making your decision.

**As an aside, another preliminary step for business owners prior to filing as an entity is to do a registered name search on the Arizona Secretary of State website. Many owners are emotionally and psychologically attached to a name prior to finding its already registered!