An LLC or Corporation? Taxation Options for US Companies

By Jarosław Kurpiejewski, Attorney-at-law, Senior Associate at Ilasz & Associates

Among the various forms of incorporation, an LLC (Limited Liability Company) stands out as the most popular choice for long-term investors. It is also the most common choice among mortgage long-term investors who purchase properties to speculate on their appreciation in value and generate rental income from residential and commercial real estate. In many states, the acquisition of real estate does not constitute a "transaction of business.” Thus, a Florida-based company, for instance, can purchase property in the State of New Jersey without the obligation to register a branch or subsidiary there.

Short-term investors tend to opt for the Corporation (Corp) structure. These investory are also known as flippers or "buy and sell investors" who acquire assets with the intention of promptly selling them at a profit. Corporations are also favored by startups and businesses aiming to raise local financing through the sale of shares to investors. Both LLCs and Corporations allow the owners a great deal of freedom in creating the company's rules.

Companies can be taxed as:

1. LLC Taxed as a Pass-Through Entity: Proprietorship, Partnership, S Corporation - or as a C Corporation. 
2. S Corporation.
3. C Corporation.

Proprietorship, Partnership, and the S Corporation are taxed on a pass-through basis. Income generated by the company is allocated to its partners and taxed only once. An alternative form of taxation for an LLC is a C Corp. The company is then taxed twice - on income at the corporate level and on dividend payments. However, this type of company may be preferable for businesses that reinvest profits or have long-term investments. S Corp is also taxed on a pass-through basis. They are more likely to be chosen by companies with more complex structures, including joint ventures. To establish an S Corp, the owner/shareholder must be a US citizen, permanent resident, or at least a resident alien. 

The C Corp is the most advanced form of company organization and taxation used when the structure and constraints associated with an S Corp. do not allow the company to continue growing. The largest companies in the US are almost exclusively organized as C Corp. 

The C Corp is also appropriate for startups planning on raising diversified financing at various development stages where it is necessary to issue various classes of shares. It is rarely chosen by companies where ownership remains in the hands of one person or a small group of owners, e.g., privately owned companies. Only about five percent of companies in the US are a C Corp. but they generate half of the profits of all US business activities.

The form of incorporation as well as the form of taxation should be made after in-depth analysis of many factors including company's structure, scope of business, and development plans.

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