Many of our customers inquire about the tax differences among C corporations, S corporations and LLC’s. Please remember that the differences in the following table represent tax differences and do not relate to operational differences. Each form of business listed here gives its owners limited liability. We believe that the information contained in the following chart is accurate, however it is no substitute for good legal or accounting advice.
Federal Tax Differences Between LLC, Subchapter-S Corporations and Subchapter-C Corporations
Note: In the comparisons below, references for Subchapter-S Corporations are after the Small Business Job Protection Act. References for LLC formation are after finalization of Check-The-Box Regulations.
Number of Owners Allowed
| Subchapter-C Corporation: |
Unlimited |
| Subchapter-S Corporation: |
No more than 100 |
| Limited Liability Company: |
Unlimited |
Restrictions on Ownership
| Subchapter-C Corporation: |
Generaly none |
| Subchapter-S Corporation: |
Numerous restriction including prohibitions on ownership by non-residents, corporations and certain trusts. |
| Limited Liability Company: |
None |
Flexibility in Owning Subsidiaries
| Subchapter-C Corporation: |
None |
| Subchapter-S Corporation: |
Cannot be owned by a C corp. Cannot be owned by a S corporation unless as a 100% subsidiary. |
| Limited Liability Company: |
Unlimited |
Flexibility of Financial Structure
| Subchapter-C Corporation: |
Unlimited |
| Subchapter-S Corporation: |
Limited to one class of stock but can have voting and non-voting stock. |
| Limited Liability Company: |
Unlimited |
Chance of Inadvertent Termination of ‘S’ Status or Partnership Tax Status
| Subchapter-C Corporation: |
N/A |
| Subchapter-S Corporation: |
Problem. Several events can result in loss of status. |
| Limited Liability Company: |
None unless an election is filed. |
Flexibility of Tax Allocations
| Subchapter-C Corporation: |
None |
| Subchapter-S Corporation: |
Distributive share must be pro-rated to stock ownership. |
| Limited Liability Company: |
Must pass the substantial economic effect under sec. 704(d) |
Tax of Gains on Contribution to Entity
| Subchapter-C Corporation: |
No gain recognized. |
| Subchapter-S Corporation: |
Must meet 80% ownership requirements of sec. 351. Gain is recognized under sec. 357 if debt exceeds basis of property. |
| Limited Liability Company: |
No gain recognized under sec. 721. |
Basis Adjustment if Shareholder/Member Guarantees Debt
| Subchapter-C Corporation: |
No basis increase unless the guarantor actually makes payment. |
| Subchapter-S Corporation: |
No basis increase unless the guarantor actually makes payment. |
| Limited Liability Company: |
Guarantee increases basis so long as member does not have right of reimbursement. |
Distribution of Appreciated Assets
| Subchapter-C Corporation: |
Corporation recognizes gain on distribution. Sec.311(b)(1) |
| Subchapter-S Corporation: |
Corporation recognizes gain on distribution. Sec.311(b)(1) |
| Limited Liability Company: |
Generally, no gain is recognized by either LLC or members. |
Step-Up of Basis on Purchase
| Subchapter-C Corporation: |
Shareholder takes cost basis of shares purchased. Corp.’s basis remains unchanged. |
| Subchapter-S Corporation: |
Shareholder takes cost basis of shares purchased. Corp.’s basis remains unchanged. |
| Limited Liability Company: |
New member takes cost basis of interest purchased. LLC may elect to step up basis of assets. |
Step-Up of Basis on Death
| Subchapter-C Corporation: |
Basis of stock is stepped-up, however basis of assets in corporation are not. |
| Subchapter-S Corporation: |
Basis of stock is stepped-up, however basis of assets in corporation are not. |
| Limited Liability Cormpany: |
Basis of interest is stepped-up. Co. may elect to also step up basis in assets. |
Creditor Protection
| Subchapter-C Corporation: |
None, stock may be seized by stockholder’s creditor. Shareholder generally is not personally liable for corp. debt. |
| Subchapter-S Corporation: |
None, stock may be seized by stockholder’s creditor. Shareholder generally is not personally liable for corp. debt. |
| Limited Liability Company: |
A judgment creditor of a member may obtain a charging order to satisfy its judgment and thereby receive any distributions to which the judgment debtor member was entitled to receive. The judgment creditor has no right to cause the membership interest to be sold or to be admitted as a member. (18-703) Members are generally not personally liable for company debts. |
Employment Taxes
| Subchapter-C Corporation: |
Dividends are not subject to employment taxes. |
| Subchapter-S Corporation: |
Distributive share is generally not subject to self-employment taxes. |
| Limited Liability Company: |
Distributions are generally subject to self-employment taxes except for passive members of an LLC with centralized management. |
Please remember to consult your attorney or accountant. This information is intended as a guide only to assist you and your tax professional in determining the type of entity you wish to form.