LLC formation, S-Corporation formation

Limited Liability Corporation or S-Corporation?

By: SW Haeger

Both the S-Corp and the LLC have distinct advantages and disadvantages that must be taken into consideration prior to deciding how you are going to incorporate your business. While we would be happy to help you with this decision, and offer number of services that provide assistance in making this decision, we want to lay all the information out so that you are able to make an informed decision. To that end, we have taken care to prepare a series of publications aimed at giving you the ability to make an informed decision on your corporation’s future.

The Benefits of the Limited Liability Corporation

The primary reason people go with the LLC, and it is by far the more popular of the two entity types, is ease. That are easier to form, easier to run, and have far less rules one must follow in order to remain compliant with the law. LLC’s have a few other distinct advantages, as outlined below.

  1. Asset Protection.

    LLC’s provide a business owner with a greater level of protection of his and his family’s personal assets should the business not succeed. So long as the business is in compliance with the maintenance rules for the LLC, and is keeping the LLC’s finances separate from the business owners personal asseets, any potential creditors of the LLC will be unable to attach those personal assets should something go awry with the business.

 

  1. Income Tax Pass Through.

    The income of the LLC can, by designation, “pass through” to the owner’s of the business. This meaning the business does not have to file it’s own separate tax return, incurring it’s own, separate tax liabilities, unless you decide to designate that the LLC should be treated as a corporation for tax purposes with the IRS. Making this choice is rare, significantly more so for a startup business.

 

  1. Paperwork.                                                                                                                                                                                                                                                                                                                                               LLC’s require very little paperwork other than an annual filing with the Secretary of State in order to maintain the corporate structure. S and C Corporation have any number of documents that must be filed every year with various state and regulatory agencies.

 

  1. Management.                                                                                                                                                                                                                                                                                                                       The requirements of the management structure can be complicated when dealing with any type of corporation. Not so with the LLC, which can define it’s own management structure within the Operating Agreement either at formation or by amendment down the road and it will be completely of the owner’s choosing.

 

  1. Shareholder Requirements.

    The LLC can be formed with as little as one “member”, or shareholder, while it can have an unlimited number should your company have a number of different owners.

  1. Dividend Flexibility.

    Members can receive revenues (and write off debts or forfeitures) at a larger percentage than their ownership percentage in the LLC, so long as it is permitted by the terms of the Operating Agreement.

 

  1. Anyone can be an owner.

    There are no limitations on the members of the LLC that might affect its’ pass-through tax status. This includes owners that are not citizens of the United States and/or are corporations or LLC’s themselves.

So why would I ever want to form an S-Corporation?

Let’s not make a decision to quickly, as the S-Corporation certainly has its’ advantages as well.

  1. Pass through Entity.

    Like the LLC, the S-Corporation is generally treated as a pass-through entity for tax purposes. Meaning the income of the S-Corporation can be assessed directly to the owners and dealt with on their personal tax return rather than having a separate tax return (and, thus, separate tax liability) for the S-Corporation.

 

  1. S-Corporations appear more legitimate.

    Investors and venture capitalists tend to view the corporate structure as more firm than that of the LLC and are therefore more likely to invest in the S-Corporation.

 

  1. S-Corporations can sell stock.

    To raise capital, corporations often sell stocks. LLC’s are only able to sell ownership interests in the company.

 

  1. Not subject to certain employment taxes.

    S-Corporation dividend payments are not subject to employment taxes such as FICA and FUTA.

 

  1. Ease of ownership transfer.

    Because the S-Corporation is owned by stockholders rather than those with an ownership interest, transfer of ownership is as simple as the sale of stock. LLC sales generally must be approved by the other members and the method of transfer must generally be allowed by the Operating Agreement for it to be effective.

  1. S-Corporations have an extensive paper trail.

    Paperwork initially may sound like something you want to avoid if possible, but in the case of your corporate entity that isn’t always the case. Paperwork creates a record of the actions of the shareholders and provides proof that the decision makers always act in the best interest of the company.

So what gives? How do I make my decision?

Looks like it could be a difficult decision to decide between the two, right? The easiest way to look at it is that if you intend on seeking investors, venture capital, or are an already existing business with more than one or two employees, you will end up wanting to go with an S-Corporation. If you are a startup or are the only person involved in your business, LLC’s are generally the way to go. Keep in mind that, as it pertains to taxes, the LLC can make an election to be taxed the same as an S-Corporation. This avoids the self-employment tax that is otherwise subjected to (unlike the S-Corporation) which, in many cases can result in a higher overall tax liability despite the “double taxation” the S-Corporation is subject to. For reference, the self-employment tax are taxes such as for social security and Medicare that you typically see deducted from your paycheck before ever receiving the benefits of your labor.

Still not sure? Click on over to the “Incorporation Station” where our team of professionals can review your situation and help you make an informed decision to ensure you and your business are as secure and possible in a manner that most closely suits your needs. And if you have decided, please fill out the form below today with your unique business situation and what you are seeking to accomplish and one of our professionals will contact you back  by telephone or email within one business day. Thanks!

 

 

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