Entity Comparison Chart::InternetLegal.com

By Rob Hassett

CAUTION – THIS CHECKLIST HAS BEEN PREPARED FOR GENERAL EDUCATION PURPOSES ONLY AND DOES NOT CONSTITUTE SPECIFIC LEGAL ADVICE. THERE ARE MANY EXCEPTIONS TO THE INFORMATION SET FORTH IN THIS CHART AND THEREFORE ANY READER SHOULD RELY ONLY ON THE ADVICE OF A PROFESSIONAL TAX ADVISER WITH RESPECT TO TAX RELATED MATTERS.

(1) Applies to All Three:
CONSIDERATION	C CORP	S CORP	LIMITED LIABILITY COMPANY*
Limited Liability	Yes	Yes	Yes
(2) Reasons to Use C:
CONSIDERATION	C CORP	S CORP	LIMITED LIABILITY COMPANY*
Number of Owners	No restrictions	1-75	No restrictions unless publicly traded
Tax Year	May be fiscal	Usually calendar	Usually calendar
Deductions for health insurance	Yes	Yes	Yes
Fed tax on income left in business	Essentially 34%	Up to 35%	Up to 35%
Qualified small business stock (10% on capital gain)	Yes	No	No
(3) Reasons to Use C or S:
CONSIDERATION	C CORP	S CORP	LIMITED LIABILITY COMPANY*
Expenses of setup	Inexpensive w/out shareholder agreements, incentive stock options, etc.	Inexpensive w/out shareholder agreements	Usually more expensive where advantageous (to deal with allocations, capital accounts, etc.)
1244 Stock (ordinary loss on sale or liquidation)	Yes	Yes	No
Tax deferred reorganization	Yes	Yes	No
ISO’s allowed	Yes	Yes	No
Gain on redemption taxed at ordinary income rates to extent of receivables	No	No	Yes
(4) Reasons to Use C or LLC:
CONSIDERATION	C CORP	S CORP	LIMITED LIABILITY COMPANY*
Allowed Owners	No restrictions	Individuals and Certain Trusts, or 100% by S	No restrictions
Classes of Ownership	Yes	Voting v. non-voting only	Equivalent to C available
(5) Reasons to Use S:
CONSIDERATION	C CORP	S CORP	LIMITED LIABILITY COMPANY*
FICA including Medicare reductions	No	Yes	No
(6) Reasons to Use S or LLC:
CONSIDERATION	C CORP	S CORP	LIMITED LIABILITY COMPANY*
Levels of Federal Taxation	2	1	1
Levels of State Taxation	2	1	1 in most states
Long-Term Capital Gain	Federal Income Tax at full rate on corporation’s gains	Federal Income Tax at 15% to shareholders	Federal Income Tax at 15% to Members
Accumulated Earnings Tax	Yes	No	No
Cash method of accounting	Generally allowed if under $5 million in sales (Restrictions apply when primary business is sale of inventory)	Generally allowed (Restrictions apply when primary business is sale of inventory)	Generally allowed if not owned by particular types of C corporations (Restrictions apply when primary business is sale of inventory)
(7) Reasons to Use LLC:
CONSIDERATION	C CORP	S CORP	LIMITED LIABILITY COMPANY*
Losses	Don’t pass through	Can’t be allocated	May be allocated
Later Conversion subject to tax on built in gains	C to S (yes ultimately) C to LLC (yes)	S to C (no) S to LLC (yes)	LLC to S (no) LLC to C (no)

* The members of a limited liability company may elect that the limited liability company be treated for tax purposes as a C corporation, an S corporation or a partnership. For purposes of this checklist, it is assumed that the members have elected that the limited liability company be treated for tax purposes as a partnership.

Rob Hassett 3/15/2000 Revision.