Blog | Personal Finance

The Difference Between an LLC and Corporation

As you build your businesses, learn how to protect your assets

Summary

• There are major differences between a corporation and an LLC

• It’s important to protect your business and your assets

• Here’s why Nevada is the key to protecting your corporate assets

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Let's look at a variety of pros and cons for certain entities so you can clearly understand some of their differences. There’s the Corporation, the Limited Liability Company (LLC), and the Limited Partnership (LP). You can have an S or a C Corporation taxation for your corporation or LLC.

But why do people choose one over the other?

Why use a corporation instead of an LLC?

A lot of people will use the Corporation option to avoid specific limitations. In some states, such as California, you can't operate through an LLC due to certain restrictions on those who are professionally licensed. You need to be able to have people invest in and out of the stock; in this case, an LLC just isn't the best option for that. There are restrictions on ownership, which is a good thing, but when you're going to go public, you're going to want to use a Corporation.

The key differences between S and C corporations

The S Corporation is good for the smaller business since it can only have up to 100 shareholders. If you're going to go public, you're going to need 400 shareholders, making the C Corporation your choice in this instance.

If healthcare is an issue for you, and you need to pay those healthcare premiums, the C Corporation is a good way to go. It allows you to write those premiums off as a business expense.

You can use that as an expense and not pay it yourself with an S Corporation, an LLC or an LP. However, if you own more than two percent of the company, which you will, the S Corporation or LLC can pay the healthcare premiums, but that payment comes back on your tax return as income.

The benefits of LLC and LP for payroll taxes

The LLC is the preferred choice for real estate since it and the LP offer great asset protection. With the LLC, if it's a partnership, you don't have to pay those darn payroll taxes.

If you're in a trade or business, you're going to pay payroll taxes on your salary income. If you own the business, that's 15.3 percent. That's the 7.65 percent that you contribute as an employee and the same amount that you contribute as the employer. You pay both halves.

Of course, you want to minimize payroll taxes, especially if you're a younger person. You must pay a certain amount of them, but don’t pay payroll taxes on every dollar of income.

If you have an LLC that operates a business, all the money flows through the LLC. Under current IRS regulations, you are subject to payroll taxes. If we have the LLC taxed as an S Corporation, you can minimize your payroll taxes.

For example, say you have $100,000 of income. A reasonable salary for someone to run this business would be $60,000. You are taxed 15.3 percent on the $60,000, but on the $40,000 in profit, you take it as a distribution and pay ordinary income on that. With S Corporation taxation (which can be used by your LLC), you can limit your payroll taxes. In this example, that means you save 15.3 percent on $40,000. That is $6,120 a year. So, you can save more than $6,000 a year by structuring this properly; it’s wise to have a team of advisors to help you with this.

Now the LLC that owns real estate is not in a trade or business. If it's a passive holding entity, the money flows through and you don't pay any payroll taxes. You can shelter that with depreciation. That can be a particularly good way to build your estate and pay less in taxes.

Protect your corporate assets by setting up in Nevada

Why doesn't the Corporation offer the greatest asset protection, like an LLC? That has to do with the charging order, which is not available to corporations except in one state. If you get sued as an individual, the plaintiff can try to reach the corporate assets by getting at your corporate shares.

The state of Nevada is the only state so far that provides charging order protection for corporate shares. By using a Nevada corporation, you are much better protected.

We've had a number of clients in New York, and other States that don't have the charging order. They have taken their New York company and merged with a new Nevada company. Then they bring the Nevada corporation back to New York to do business.

By doing that, you have the charging order protection baked into the cake. Many clients, when they're starting new corporations, will set up in Nevada then qualify or register to do business in their home state. It's important to realize that asset protection exists via the charging order for Nevada corporations, but the other 49 States don't offer that protection.

Find out more

There are many resources available for people starting a business or investing in real estate. Consider visiting corporatedirect.com, to start. There are many articles, along with other easily accessible resources. You can even sign up for the newsletter to stay informed. You can also find more tips in the book Start Your Own Corporation, written by Rich Dad Legal Advisor, Garret Sutton.

It’s important that you stay informed about key changes in asset protection laws. Make sure you're up to date on what you should be doing to protect yourself, and your new business will thrive!