Taxation: As discussed above, a LLC is a "pass-through" entity for tax purposes. Therefore, an LLC pays no income tax. All profits or losses pass through to the members/owners and are reflected on their personal returns. The owners of an LLC are considered self-employed and, therefore, must pay self-employment taxes on all the profits earned by the LLC regardless of whether the owners take the profit as salary or distributions. Self-employment taxes pay for Social Security and Medicare benefits. Self-employment tax is charged at a rate of 15.3%. 12.4% of the 15.3% is directed to Social Security beneficiaries and the remaining 2.9% helps fund Medicare.

C-corporation income is taxed a corporate tax rate. Income taxes are also paid by shareholders (at their personal tax rate) who receive financial distributions from the corporation. People wishing to avoid this type of double taxation may stay clear of a C-corporation.

With the exception of required payroll related taxes, the salaries of the operators of a C-corporation can be deducted as an expense from the income of the C-corporation, thus shielding some of the income of the corporation from double taxation. Operators must still pay personal income tax based on their income from the C-corporation. In some cases, C-corporation salary expenses may offset the net profit of the corporation, freeing the corporation from owing any taxes.

Number of Owners: C-corporations can have an unlimited number of shareholders while LLCs can have an unlimited number of members/owners.

Ownership by Non-U.S. Residents: Non-U.S. residents can own both C-corporations and LLCs.

Ownership by Other Entities: Both C-corporations and LLCs can be owned by other entities such as S-corporations, other C-corporations, many trusts, limited liability companies, or partnerships.

Back to Corporate Formation