S Corp Versus Limited Liability CompanyS Corp vs. Limited Liability Company (LLC)
All Rights Reserved. Copyright Â© 2010 Michael Jagoda
The LLC is a hybrid entity that combines the personal liability protection of a corporation with the operational ease of a sole proprietorship or partnership. It is also designed to allow business owners some additional choices when it comes to how the LLC will be treated for tax purposes. The formation of an llc is not complex but is more formal than that of a sole proprietorship or general partnership.
An S corp is a special type of corporation of particular interest to small business owners. It is formed just like a regular or C corporation but then files for S corporation status with the IRS. Obtaining S status allows the corporation to take advantage of pass-through taxation and avoid the double taxation that is applied to C corps. At this point it is important to note that the IRS now allows LLCs to elect S status as well. This allows you to form an llc for the ease of operation and have it treated as an S corp for tax purposes.
There are two main reasons business owners choose to form an llc. One is for the personal liability protection the other is ease of operation. For example an llc has great flexibility in setting up the management structure of the business. An S corp on the other hand must have directors and elect officers. LLCs also have fewer state compliance and maintenance issues than an S corp.
When it comes to allocating income the owners of an LLC can have various classes of ownership interest and there is no limit on the number of owners an llc can have. An S corp can only issue one type of stock and is limited to one hundred shareholders. Further, members of an llc can be individuals, corporations, LLCs, trusts or partnerships. S corp owners must be individuals.
S corps do offer some of their own advantages. For example, corporate losses can be passed through to the shareholders, and as the owner of the corporation, you may be able to apply the loss against income that appears on your personal return. Also, owners do get personal liability protection without being subject to the double taxation of C corporations. It may also be easier to raise capital as a corporation than it would be as a sole proprietorship or partnership.
But LLCs are not without their downside. Limited Liability Companies earnings can be subject to self employment tax, and a few states limit the duration of existence for an LLC. Additionally, a limited liability company cannot offer incentive stock options.
When comparing the LLC vs S corporation keep in mind that each offer certain benefits but it's up to you to weigh up your options and decide which might work best for your business. As always choosing what is right for your business situation requires information and examination. The best thing you can do is discuss your options with your accountant or legal advisor before making any final decisions.