How to use a Book to Grow your Business

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Differences between LLC and Inc.

Many people ask about the differences between a Limited Liability Company (LLC) and a Corporation when either the company or the corporation can be established to have the same tax structure and liability protection characteristics as either a “C” corporation or an “S” corporation.

First let’s point out the similarities.

Either form of the “C” entity can chose a financial year end different from the calendar year. Either form of the “C” entity must file a separate tax return because it is a separate legal “person”.
Pays 15 % on first $50,000 in profits.
3 ways to get money out:
- W2 to owner as an employee.
- Dividends – distribution of retained earnings already taxed. Taxed again at the shareholder level at 15%.
- Lend money to another entity that invests for you.

Either form of the “S” entity has income and taxes flow down to individual shareholders.
Allows you to decide on how much you take as an employee (W2) and pay payroll taxes on, and how much is a distribution on which you pay only income tax.
No self-employment tax.

The differences revolve around the administration of the different “groups” of people in the two forms of entities.

Corporations	Limited Liability Companies
Shareholders	Members
Board of Directors	Members or Managers
Officers (President, etc.)	Managers

Each different group needs to have a meeting (at least annually) where specific actions must be recorded. Now, in many small companies, one or two people get to play all of the different parts. What gets many people confused is which group is responsible for which part of the necessary paperwork.

As the owner of a corporation, you are required to hold shareholders' and directors' meetings, maintain corporate records, and document major corporate decisions. Neglecting these formalities -- in essence, ignoring your corporation's separate existence -- can mean that if your business runs into legal trouble, your corporate status may be disregarded by a court. If this happens, you may be held personally responsible for the corporation's debts.

LLCs have two kinds of groups – Members and Managers. If all Members also manage the LLC, they are referred to as Managing Members; then only one set of meetings, etc. are required to maintain the formalities. Although they are not strictly required, it's still a good idea to hold meetings and document significant decisions in the form of resolutions to ward off future challenges.

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