When it comes to deciding whether to structure your company as an S Corporation or an LLC, you need to know the advantages and disadvantages of each form.
Many small businesses begin their lives as sole proprietorships, and then bloom into something bigger. That’s when the decision to incorporate comes into play. There are options for business owners, and all have advantages and disadvantages. The next step for many sole proprietorships is either creating a Limited Liability Company, or LLC, or an S Corporation.
–Limit the liability or the owners and/or shareholders. They allow the business and its assets to be liable and not the owners’ and shareholders’ personal property.
–Have tax advantages. In most cases, LLCs and S Corporation avoid the double taxation of C Corporations. LLCs and S Corporations pay personal income tax based on the company’s profits and the corporation itself does not. In C Corporation, shareholders are taxed on profits and the corporation also pays the IRS.
This is where the similarities end.
–LLCs are extremely flexible and less formal than a corporation. For example, no annual meeting or meeting minutes are required for an LLC in most cases, but a corporation must submit its annual meeting minutes to the secretary of state.
—In an LLC, the day-to-day operations are more like a sole proprietorship. In a corporation, a board of directors or officers has ultimate control of the company.
—LLCs must pay self employment tax based on net income, while an S Corporation pays tax only on actual salary.
—S Corporations require far more paperwork and government oversight than an LLC.
—LLCs can distribute profits in any manner it wants. For example, even if ownership of the LLC is 60/40, profits may be distributed 50/50 or 70/30 or any combination. S Corporations must distribute profit based on shareholder percentages.
Roberto Neuberger is President and CEO of ActiveFilings.com which has over 8 years experience forming over 39,000 corporations, LLC’S and non-profits.