R. Shawn McBride was recently interviewed by Tilde Guajardo on Womanars. In part 7 of that interview, Shawn talks about the difference in an LLC and a C Corp.
Tilde: So, I’m gonna give you this last question because I’m sure a lot of people have it that are looking at different structures for their businesses. And even if they’re already in business as an LLC, considering going into an S corp or a C corp. So, what is the main difference between let’s say an LLC and a C corp?
R. Shawn McBride: Yeah, their structurally different. They’re treated differently for tax purposes. You know the C corporation typically is taxed. The C corporation level and then there’s a dividend that’s also taxed at the owner level. The LLC avoids this issue as does the S corporation. Now the S corporation and the partnership are taxed a little different for income tax reasons. So we’ve got three different ways that we can blend the income tax regime. And we got to really look at the situation and at what’s best.
For many business owners, the S corporation tax regime is the one that works well for them. It allows them to take profits as an owner which are not subject to self-employment tax. They have to take a reasonable salary as the owner so they can get that salary that is subject to self-employment tax. But by doing it that way, they potentially avoid, pay a little less tax than what they would as a true partnership or LLC because the LLC is taxed as a partnership and has more than one owner. Now to make all that even more complicated, the IRS came out with what they call “check the box regulations” which allow LLC’s to be taxed as S corporations so you can have an LLC for state law purposes and a corporation for tax law purposes. So you can blend all of this together. You just want to get to the right one. The LLC for state law purposes is different than the corporation and then the S corporation is just a corporation that has made an election with the IRS. Those two entities, the LLC versus
The LLC for state law purposes is different than the corporation and then the S corporation is just a corporation that has made an election with the IRS. Those two entities, the LLC versus the corporation. The LLC is very flexible, freedom, you got to write everything down though. You need a longer agreement to really document how the partnership works together. Whereas the corporation has a board of directors, have shareholder meetings, resolutions, and a lot of paperwork but it’s a more rigid structure. And which of those two you want, really depends on what your objectives are for your business and how you see your management working – your long term plans.
R. Shawn McBride: Most people these days like that flexibility and freedom of the LLC.
Tilde: Right and if I’m not mistaken, please correct me if I’m wrong, can’t you convert your LLC to a C corp within a certain amount of time.
R. Shawn McBride: Yes. Well, most states allow you to do conversions, which means you can take entities, you can continue your business as a business, and change it into a new form so you basically take what was an LLC today, could be a C corporation tomorrow. Or C corporation can become an LLC. Texas has these options. Most states are starting to adopt these kinds of options. You can move these things back and forth. So you don’t have to pick something forever which is good. Before those laws came out, you would have to do a merger so or some other way of getting a corporation into an LLC or an LLC into a corporation and that took a lot more paperwork. So now the state has just made it a lot easier. So don’t feel like you have to lock in forever. Lock in for the time being, and make a decision. You typically want an entity for liability protection purposes.
R. Shawn McBride: But you don’t have to pick it forever. You can adjust.
Tilde: Yeah, and you know that’s kind of what freed me ’cause I’m one of those people that like to research and research and research. And so the hardest things for me was reading up on all the different types of corporations and until my CPA told me, you know, you can just choose one now and you can always change it later. That was liberating to know that if something changed in the business and if you know it was a little bit better, for tax purposes, to maybe switch it out a little bit later then we could do that. So it does allow you allow a lot of freedom.
R. Shawn McBride: Yes, you don’t have to make the perfect decision. So you know you can pick what’s right.
Tilde: Now the other thing along the same lines is where to actually file an LLC or your business entity. Does that really make that much of a difference?
R. Shawn McBride: It does, depending on what you’re doing. You get to pick. Under the US system, the way it works, really you can pick any state to form your LLC or corporation. Most people pick the state that they’re operating in so if you’re operating in a single state, most people will form in that state. Other popular options are states like Delaware, Nevada, and Wyoming – this kind of get a lot of filings from throughout the country. And what people are typically looking at there is, how does the relationship among the partners get governed by state law. So Delaware kind of is the default. That’s where a lot of Fortune 500’s have been filed for years. They kind of keep an updated LLC law so a lot of people want to use Delaware. So particularly if you’re getting an outside investor, sometimes that outside investor will say, you must be a Delaware LLC because we only invest in Delaware LLC’s. So you may see those kinds of influences.
For many people, we’re here in Texas today, if you’re in Texas and you’re forming in Texas, most people file a Texas LLC. They’ll keep it simpler. They’ll keep it easier. It’s less filing. Not only do you have to file in the state you select, but you have to file in every state that you do business in as a foreign entity. Even though you’re all within the US, you’re filing as a foreign entity in every state you’re doing business in. So for a lot of people, it’s one less filing if they just file in the state that they’re formed in.
R. Shawn McBride: But if you’re doing something sophisticated, then you might want to do an analysis of what’s good for your investors or how does your partnership agreement work for some of those dispute provisions. So we get into more technical complex deals where maybe they’re paying a lot of attention to what state they’re forming in.
Tilde: Right. Awesome. Well, thank you so much for all the great advice. I’m looking at our Facebook feed to make sure that nobody has any questions and I don’t see any. But thank you so much for all the information. It’s great information.
R. Shawn McBride: Of course.
Tilde: Ladies, gentlemen if you’re watching. Please take it to heart and tell people how they can get a hold of you, Shawn.
R. Shawn McBride: Sure you can reach out to me at www.mcbrideforbusiness.com, or 214-418-0258. The R. Shawn McBride Fan and Audience Page is on Facebook. I check it regularly. It’s a great place. Like it and send me a message if you need to get a hold of us. We’ll monitor that regularly.
Tilde: Yeah, and Shawn you started daily Facebook–
R. Shawn McBride: Yes, we’re doing videos on business topics that we’re putting on that feed. So, stuff that we’re seeing, real life stuff that we’re getting from our clients, from the audiences when I’m speaking. Real issues that people are dealing with, we’re making short two to three-minute videos, so very digestible, and we’re putting them on both the R. Shawn McBride Fan and Audiences Page and on the McBride for Business YouTube channel. So we’re really trying to make this information accessible so that people can do a lot of this on their own. And my goal really is, if somebody really wants to do something big or custom, that’s when I’m happy to come in. I want to give away all kind of the stuff that we’re seeing and what we’re learning along the way and really help people do the business stuff as much as they can on their own.
Tilde: Yeah. Well, thank you for doing that. I know I’ll be watching and you guys be sure and check out his Facebook page, as well.
R. Shawn McBride: Yes definitely.
Tilde: Especially if you are thinking about jumping into business, these are critical things that you need to think about and also just lay the foundation that’s going to last and get all your ducks in order. That’s one thing that I made sure to do when I first started Womanars, you know, is really research the type of business entity that I wanted to be. And like I said, I could have easily gotten stuck with paralysis by analysis if you’re not sure, just remember, you can always change it later. So don’t feel like you have to make the right decision right away because that’s not the case. You can easily change it a little bit later. But it is imperative that you do lay the foundation initially by thinking about all these questions that Shawn talked about in his three C’s. If you are thinking about going into partnerships–
R. Shawn McBride: It makes a big difference in the end. Absolutely.
Tilde: Yeah, yeah. You’re welcome, Marsha. You know, when I met Shawn, I knew that I had to have him on. He’s given out some great information. I loved hearing him speak on Friday ’cause then I got excited about having him here on Tuesday so Shawn thanks a bunch for all the great information and thank you guys for watching. Again, if you’re watching live, and you’d like the information that you’re hearing, the content that you’re hearing, please share us, don’t keep this a secret. And especially if you know somebody that’s thinking about going into business or thinking about going into partnership with somebody, share this video with them, it’s critical. So, thanks, everybody and have a great week.
R. Shawn McBride: Thank you.
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This posting is intended to be a tool to familiarize readers with some of the issues discussed herein. This is not meant to be a comprehensive discussion and additional details should be discussed with your attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances. Each case is unique. Past results do not guarantee future outcomes. This article should not be treated as legal advice to any person or entity. Freeimages.com/photographer Robert Owen-Wahl.
About the Author
R. Shawn McBride is the Chief Innovation Officer at McBride For Business, LLC. His signature keynote, The 3 Laws of Empowerment, gives audiences an entertaining look at how they can prepare, plan and protect themselves. You can email R. Shawn McBride or (214) 418-0258.