Michigan

Advantages of Doing Business as a Michigan Corporation Instead of a Michigan Limited Liability Company

While limited liability companies (LLC's) are the right choice of entity for many Michigan businesses, in some situations, using a corporation instead of an LLC may be the better choice. This post discusses some of the specific advantages for a Michigan business to use a corporation instead of an LLC to conduct its affairs.

1. Unlike LLC's, corporate profits are not subject to Social Security and Medicare taxes

As with sole proprietorships or a partnership, profits and salaries of an LLC are subject to self-employment taxes. Self-employment taxes are Social Security and Medicare taxes. The rate of these taxes are currently equal to a combined 15.3% rate. Unlike LLC's, with a corporation, business owners will have to pay Social Security and Medicare taxes only on salaries, not profits. This may provide for greater planning opportunities for entrepreneurs to legally avoid paying higher Social Security and Medicare taxes.

2. Corporations enjoy greater respect and acceptance

LLC's are still a relatively new business entity form. As such, not everyone (including some accountants) is as familiar with them as they are with corporations. In some cases, banks, financing companies, and certain kinds of vendors may be hesitant to extend credit to LLC's. Also, a number of states, including Michigan, restrict the type of business an LLC may conduct.

3. Corporations are able to offer a greater variety of fringe benefits at a lower tax cost

One of the biggest advantages corporations have over other business entities, including LLC's, is in the area of fringe benefits. Thanks to the tax code, corporations can offer a better variety of fringe benefits than other business entities. A number of retirement, employee stock purchase, and stock option plans are available only for use only by corporations. In addition, sole proprietors, partners and employees owning more than 2% of an S corporation are required to pay taxes on fringe benefits such as group-term life insurance, medical reimbursement plans, medical insurance premiums and parking. Stockholder-employees of a C corporation are not required to pay taxes on these kinds of benefits.

4. Corporations can lower taxes through a process called income shifting

One of the drawbacks of the corporate form is that C corporations (the type of corporation that has the most options for fringe benefits) are subject to double taxation. In other words, the corporation is taxed on its profits, and then the stockholders are taxed on any distributions the corporation makes to them. Despite this double taxation issue, in some situations corporations can offer greater flexibility for tax planning than LLC's. For example, a closely held C corporation with competent legal and accounting advisers rarely pays tax on its profits due to a number of techniques. Moreover, a C corporation can employ a very useful technique called income shifting to take advantage of lower income tax brackets and shift income from high tax brackets to lower tax brackets.

Choosing the right entity for a business is a serious decision that should only be made in consultation with a trusted business attorney. The stakes are high and the wrong decision can cost a business dearly.

Full post as published by Michigan Business Lawyer Blog on January 03, 2008 (boomark / email).