LLCs vs. Corporations- Economic Differences Part 2

By Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, a Freehold, NJ Business Corporate Attorney 

In our last post, I discussed the differences between LLCs and Corporations as it relates to management and operation.  We saw how an LLC allowed its members and managers more flexibility in its operation and allowed its member owners to avoid some of the more enjoyable responsibilities and duties imposed on directors or officers in a corporation.   Today, we will discuss the economics of both types of entities, including how each gets taxed.

One of the biggest differences between the company types is how you can transfer ownership of the company.  With a corporation, (unless there is a shareholder’s agreement), ownership interests can be transferred as simply as picking up the phone and authorizing your stock broker to sell the stock in the corporation you currently own to a new shareholder.  LLCs do not allow that level of flexibility with ownership. While members can transfer certain of their economic benefits freely, such as profit distributions pursuant to the operating agreement, if one wishes to become a member of an LLC and obtain full ownership status inside the LLC, the other members must all agree to allow the new person to become a member.  In addition, New Jersey’s Uniform LLC law also requires equal distributions to all members regardless of how much capital each member has contributed to the LLC, whereas corporations provide dividends to their shareholders according to the number of shares they have.  While this can be changed depending on the language of the operating agreement, absent same this is an adverse consequence to the unincorporated.

How each business is taxed also varies.  LLCs with only one member report their income as personal income on the member’s personal tax return.  LLCs with more than one member are taxed as partnerships, and each member is allocated a portion of the income for tax purposes based on the terms of the operating agreement.  The default is usually to allocate income based on their share of the business.  Members are considered self-employed, and are required to pay a portion of the LLC’s employment taxes.  Corporations are taxed depending on their type.  The most common type, a “c-corporation”, pays taxes on its income, with its shareholders paying taxes on dividends received from the corporation.  “S-corporations”, like LLCs, allocate income to the shareholders based on their ownership interests.  But LLCs are flexible in how they allocate income for taxation purposes.  Shareholders of an “s-corporation” must pay taxes on their allocated share according their ownership interest. An S-corporation’s status is also restricted by the IRS. The code specifies that there can only be one class of stock (which means everybody gets paid evenly rather than certain stock getting dividends over other stock). No more than 100 shareholders, and the stockholders must be U.S. citizens or corporations of a U.S. state.

To discuss your NJ Business Corporate matter, please contact Fredrick P. Niemann, Esq. toll-free at (855) 376-5291 or email him at fniemann@hnlawfirm.com.  Please ask us about our video conferencing consultations if you are unable to come to our office.

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