7 Reasons Why LLCs Are Better Than C Corps or S Corps
If you are starting a business, you might be wondering which type of legal entity is best for you. Should you form a limited liability company (LLC), a corporation (C corp), or a subchapter S corporation (S corp)? While there is no one-size-fits-all answer, there are some advantages that LLCs have over C corps and S corps. Here are seven reasons why LLCs are better than C corps or S corps.
1. LLCs have more flexibility in taxation
Unlike C corps, which are taxed at the corporate level and then again at the shareholder level, LLCs can choose how they want to be taxed. They can elect to be taxed as a sole proprietorship, a partnership, an S corp, or a C corp. This gives them more control over their tax situation and allows them to avoid double taxation.
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2. LLCs have less paperwork and formalities
Unlike C corps and S corps, which have to follow strict rules and regulations set by the state and the IRS, LLCs have more freedom in how they run their business. They do not have to file annual reports, hold annual meetings, keep minutes, issue stock certificates, or maintain a board of directors. This saves them time and money and reduces the risk of legal problems.
3. LLCs have more protection from personal liability
One of the main benefits of forming an LLC is that it provides a shield between your personal assets and your business liabilities. If your business is sued or goes bankrupt, your personal assets are generally safe from creditors and lawsuits. However, this protection is not absolute. You can still be held personally liable if you commit fraud, mix personal and business funds, fail to maintain your LLC status, or act negligently.
4. LLCs have more flexibility in management and ownership
Unlike C corps and S corps, which have to follow a rigid structure of shareholders, directors, and officers, LLCs can decide how they want to manage and operate their business. They can have one or more owners (called members), who can be individuals, corporations, trusts, or other entities. They can also have one or more managers, who can be members or non-members. They can set their own rules and policies in an operating agreement, which governs how the LLC is run.
5. LLCs have more options for raising capital
Unlike S corps, which are limited to 100 shareholders and can only issue one class of stock, LLCs can raise money from various sources and offer different types of interests to investors. They can issue membership units, which are similar to stock shares, or they can issue debt instruments, such as loans or bonds. They can also attract investors from different countries and backgrounds, as they are not subject to the same restrictions as S corps.
6. LLCs have more continuity and transferability
Unlike sole proprietorships and partnerships, which end when the owner dies or leaves the business, LLCs have a perpetual existence. They can continue to operate even if one or more members die, retire, or sell their interest. They can also transfer their ownership interest to others without affecting the LLC’s status or operations. However, some states may require the consent of other members or impose other limitations on the transferability of LLC interests.
7. LLCs have more access to expert advice and support
As an LLC owner, you can benefit from the expertise and guidance of professionals who specialize in LLC formation and management. You can hire an attorney, an accountant, a tax advisor, a business consultant, or other experts who can help you with the legal, financial, operational, and strategic aspects of your business. You can also join online communities and networks of other LLC owners who can share their experiences and insights with you.
These are some of the reasons why LLCs are better than C corps or S corps for most small businesses. However, every business is unique and has its own goals and needs. Therefore, before you decide which type of entity to form, you should consult with a qualified professional who can advise you on the best option for your situation.
LLC vs S-corp vs C-corp: A Statistical Comparison
In this blog post, we will compare three common types of business entities in the US: LLC, S-corp, and C-corp. We will use some statistics to show the differences and similarities among them in terms of formation, taxation, and ownership.
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According to the US Census Bureau, there were about 5.9 million employer firms in the US in 2019. Of these, about 2.4 million were corporations, 1.6 million were LLCs, and 1.9 million were other types of businesses (such as partnerships and sole proprietorships).
Among the corporations, about 1.8 million were S-corps and 0.6 million were C-corps. This means that about 75% of corporations chose the S-corp tax status, while 25% chose the C-corp tax status. This also means that S-corps accounted for about 30% of all employer firms, while C-corps accounted for about 10%. LLCs accounted for about 27% of all employer firms.
These statistics suggest that S-corps are the most popular type of corporation, while LLCs are slightly more popular than C-corps among all types of businesses.
One of the main differences between LLCs, S-corps, and C-corps is how they are taxed. LLCs are typically taxed as pass-through entities, meaning that their profits and losses are reported on the owners’ personal income tax returns. S-corps are also pass-through entities, but they have to meet certain requirements to qualify for this tax status. C-corps are taxed as separate entities, meaning that they pay corporate income tax on their profits, and their shareholders pay personal income tax on their dividends.
According to the IRS, there were about 4.4 million S-corp tax returns filed in 2018, reporting a total net income of $472 billion. The average net income per return was $107,000.
There were about 1.7 million C-corp tax returns filed in 2018, reporting a total net income of $1.9 trillion. The average net income per return was $1.1 million.
There were about 3.8 million partnership tax returns filed in 2018, reporting a total net income of $1 trillion. The average net income per return was $263,000.
Note that partnership tax returns include those filed by LLCs that are taxed as partnerships, as well as those filed by other types of partnerships. The IRS does not provide separate statistics for LLCs.
These statistics suggest that C-corps have much higher profits than S-corps and partnerships (including LLCs), but they also face double taxation on their earnings.
Another difference between LLCs, S-corps, and C-corps is how they are owned and managed. LLCs have a flexible ownership structure that allows them to have any number and type of owners (called members), who can also manage the business or delegate management to others. S-corps have a more restrictive ownership structure that limits them to have up to 100 shareholders who must be US citizens or residents, and who have equal voting rights and profit-sharing rights. C-corps have the most complex ownership structure that allows them to have unlimited shareholders who can be US-based or foreign-based, and who can own different classes of stock with different voting rights and dividend rights.
According to the US Census Bureau’s Annual Business Survey, there were about 32.5 million business owners in the US in 2018. Of these, about 5.6 million were corporate owners (including both S-corp and C-corp owners), 10.5 million were partnership owners (including both LLC and other partnership owners), and 16.4 million were sole proprietorship owners.
Among the corporate owners, about 4.2 million were S-corp owners and 1.4 million were C-corp owners. This means that about 75% of corporate owners were S-corp owners, while 25% were C-corp owners.
Among the partnership owners, about 7.9 million were LLC owners and 2.6 million were other partnership owners. This means that about 75% of partnership owners were LLC owners, while 25% were other partnership owners.
These statistics suggest that LLCs and S-corps have more owners than C-corps, but they also have more limitations on who can be their owners.
LLCs, S-corps, and C-corps are different types of business entities that have different advantages and disadvantages. Depending on your business goals, needs, and preferences, you may choose one of them or another type of business structure. Before making a decision, you should consult a professional accountant or attorney who can advise you on the legal and tax implications of each option.
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