Advantages of a Corporation

A corporation is an artificial legal "person" which carries on business through its directors and officers for its shareholders. This legal person carries on business in its own name and shareholders are not personally liable for its acts. An S corporation is a corporation that has filed a form with the IRS choosing to have all profits taxed to the shareholders, rather than to the corporation. A C corporation is any corporation that has not elected to be taxed as an S corporation. If properly organized, shareholders have no personal liability for corporate debts and lawsuits, and its officers usually have no personal liability for their corporate acts. The existence of a corporation may be perpetual. There are tax advantages allowed only to corporations. Additionally, capital may be raised by issuing stock, and it is easy to transfer ownership upon death. The S corporation avoids corporate taxes but still retains corporate advantages.

Disadvantages of a Corporation

While a corporation theoretically allows shareholders to avoid personal liability for borrowed money, as a practical matter, the shareholders of a small corporation will often be required to personally guarantee loans, leases, inventory and equipment purchased on credit, or other obligations of the corporation. The start-up costs for forming a corporation are substantial. And, there are certain formalities such as annual meetings, separate bank accounts that must be followed. Failure to do so may allow a creditor to "pierce the corporate veil", and hold the shareholders personally liable for corporate debt. Additionally, unless a corporation registers as an S corporation, it must pay federal income tax separate from the tax paid by the owners, and must pay the California franchise tax.

Advantages of a LLC

The LLC offers the members the limited liability of corporate shareholders, and the tax advantages of a partnership. It offers more tax benefits and flexibility than an S corporation because it may pass through more depreciation and deductions. It may have different classes of ownership, an unlimited number of members, and aliens as members. If it owns appreciated property, it has more favorable tax treatment upon dissolution than an S corporation. The LLC is also extremely flexible in structure and operational aspects, since those are not dictated strictly by statute as they are for corporations, without the restrictions applicable to limited partnerships and S corporations.

Disadvantages of a LLC

The statutory requirements to set up an LLC are relatively straightforward and simpler than a corporation to complete. However, the governance documents and agreements between members can be quite involved and costly to prepare. While all items of income and expenses pass through to the individual members much like a partnership, the LLC must still pay a minimum franchise fee in California.