Advantages of LLCs Over Corporations

Corporations have been around for a long time.  Limited liability companies (LLCs) are a newer type of business entity.  A corporation offers the shield of limited liability for its owners, the shareholders. An LLC offers the same shield for its owners, the members.

There are many other characteristics and features that are common to both corporations and LLCs.  Yet, the LLC form is now the entity of choice for most business and investment deals.  Why? Because the LLC form has numerous advantages over corporations.  Here are a few:

  • There are no restrictions on the types of persons who may be LLC members; in contrast, S corporations have many restrictions on who may be shareholders.
  • An LLC may allow different distributions among its members; corporations must gear distributions to share ownership.
  • An LLC’s members may share profits and losses in unique and flexible ways; shareholders in C corporations do not share corporate profits and losses at all and S corporations can only allocate corporate profits and losses according to share ownership.
  • An LLC may allocate management authority and voting rights any way it wants; a corporation grants management authority to its directors and officers and must create separate classes of shares to vary voting rights.
  • Property can be contributed to LLCs income-tax free; in contrast, property contributions to corporations are taxable events except where the person contributing owns 80% or more of the corporation.
  • An LLC may distribute its assets to its members without causing an income tax; a distribution by a corporation of its assets is a taxable event to its shareholders.
  • An LLC may be organized for non-profit activities; a regular corporation can be organized only for profit-making activities.  For non-profit activities, a non-profit corporation should be used.
  • Annual meetings of shareholders are required by most corporate statutes; LLCs have no requirement for member meetings.
  • LLCs are treated as pass-through entities for income tax purposes without filing any form with the IRS; C corporations cannot be pass-through entities, and S corporations are pass-through entities for income tax purposes but must file a special form with the IRS to receive such treatment.
  • There are no restrictions on how many members an LLC may have; S corporations may have no more than 75 shareholders.
  • For LLCs, entity-level debt is included in the basis of the members’ interests in the LLC; in contrast, shareholders may not include corporate debt in the basis of their shares.
  • When an LLC member dies, the LLC may increase its basis in a portion of its assets to fair market value; corporations have no such flexibility.
  • An LLC may convert to a partnership tax-free; when a corporation converts to a partnership, it is treated as a taxable liquidation of the corporation.

To obtain the full benefits of the LLC form, advice and assistance from a competent lawyer are essential