Whether your business is just starting out, or you are pondering changing its structure, the first step is often comparing the benefits of a limited liability company (LLC) versus an S Corporation, or S Corp. These structures share some qualities, but they also have important differences. It’s wise to familiarize yourself with both, before you make the decision.
Before you incorporate or form an LLC, keep these in mind:
Some of the things that LLCs and S-Corps have in common include:
LLC owners can have members, managers or owners manage their LLC. If it is run by members, the LLC is a good deal like typical partnerships. If managers run it, the LLC resembles corporations. Members are not involved in daily decisions of the business. Delaware LLC businesses receive many benefits in taxation and business court cases.
S Corps have officers and directors. Their board of directors handles major business decisions but not the daily operations. The board also oversees corporate affairs. Officers elected by the directors manage the daily affairs of the business.
Other Differences between LLCs and S Corps Include:
Self-employment taxes – S Corps, after incorporation, may see preferable taxes for self-employment as compared to those of LLCs. An owner can be treated like an employee and thus paid a salary deemed reasonable. Corporate earnings after the owner is paid may be treated like unearned income, which is not taxable for self-employment purposes.
Their very existence – S Corps’ existence is forever, but in some states, LLCs may need to have a dissolution date in the documents for formation. Withdrawal or death of even one member can cause the dissolution of the LLC. A C corporation or C corp is another entity altogether, and not reflected here.
Which Is Best for Your Company?
When you are pondering how to incorporate a business or on forming an LLC, you must consider which benefits are most useful to your company. Self-employment taxes may be less if you form an S Corp. In addition, you will not have to dissolve or reorganize your S Corp if an owner leaves or dies. These are just two possible scenarios, though. Speak to a business tax expert or a business services company like this to determine which type of business structure is the best for your company. You can explore more differences between entity types at USA-Corporate.com.
Before you incorporate or form an LLC, keep these in mind:
Some of the things that LLCs and S-Corps have in common include:
- Separate entities – A state filing creates separate legal entities.
- Limited liability protection – Owners are not normally responsible for liabilities and debts of the business.
- Ongoing requirements of the state – Both are subject to formalities mandated by the state. This includes paying of fees and the filing of annual reports.
- Pass-through taxation – Both entities typically have pass-through taxation. S corps have to file business tax returns, but LLCs only need to file business returns when their LLC has two or more owners. No income taxes are paid by the business. The profits or losses of the business are reflected on the personal tax returns of the owners. Taxes, if due, are paid by the individual owners.
LLC owners can have members, managers or owners manage their LLC. If it is run by members, the LLC is a good deal like typical partnerships. If managers run it, the LLC resembles corporations. Members are not involved in daily decisions of the business. Delaware LLC businesses receive many benefits in taxation and business court cases.
S Corps have officers and directors. Their board of directors handles major business decisions but not the daily operations. The board also oversees corporate affairs. Officers elected by the directors manage the daily affairs of the business.
Other Differences between LLCs and S Corps Include:
Self-employment taxes – S Corps, after incorporation, may see preferable taxes for self-employment as compared to those of LLCs. An owner can be treated like an employee and thus paid a salary deemed reasonable. Corporate earnings after the owner is paid may be treated like unearned income, which is not taxable for self-employment purposes.
Their very existence – S Corps’ existence is forever, but in some states, LLCs may need to have a dissolution date in the documents for formation. Withdrawal or death of even one member can cause the dissolution of the LLC. A C corporation or C corp is another entity altogether, and not reflected here.
Which Is Best for Your Company?
When you are pondering how to incorporate a business or on forming an LLC, you must consider which benefits are most useful to your company. Self-employment taxes may be less if you form an S Corp. In addition, you will not have to dissolve or reorganize your S Corp if an owner leaves or dies. These are just two possible scenarios, though. Speak to a business tax expert or a business services company like this to determine which type of business structure is the best for your company. You can explore more differences between entity types at USA-Corporate.com.