S Corporation Versus Limited Liability Company
Copyright (c) 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 LLC's 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. First it provides personal liability protection and second is the ease of operation. For example an llc has many options when setting up the management structure of the business. An S corp on the other hand must have directors and elect officers. LLC's 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 class of stock and is limited to a certain number of shareholders. Further, members of an llc can be individuals, corporations, LLCs, trusts or partnerships. S corp owners must be individuals.
S corp's do offer a few 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 your reported personal income. Also, owners do get personal liability protection without having to deal with the double taxation associated with C corporations. You may also find it easier to raise capital for a corporation than it would be as a sole proprietorship or partnership.
However LLC's are not without their disadvantages. Limited Liability Companies earnings can be subject to self employment tax, and a few states limit the duration of existence for an LLC. Additionally, an LLC is unable to offer incentive stock options.
Questions and Answers
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Corporation is a legal form of organization of persons and material resources, chartered by the state, for the purpose of conducting business. Corporation is owned by shareholders, the Board of Directors governs the business, and elected officers manage the day-to-day activities. Corporation must adhere to corporate tax laws and file corporate taxes regularly.
S-Corporation is a regular corporation that has 100 shareholders or less and that passes-through net income or losses to its shareholders for tax purposes (similar to sole proprietorship or partnership). Since all corporate income is "passed through" directly to the shareholders who include the income on their individual tax returns, S-Corporation are not subject to double taxation.
LLCs enjoy very favourable tax treatment. They don’t have their own set of tax rules and there’s no such thing as an LLC tax return. What makes them special is that members can choose how the business is taxed.
Creating a business is never been easy as there are a lot of things that you need to consider in order to become one of the most successful business in the society. Considering all the facts before deciding what type of entity to choose is also not that easy because not matter what type of business you have it will all depend to the chosen entity that will help work out to achieve the goal in your business.
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The key reason why some firms thrive while some implode during an financial recession is still a puzzle to many people business-owning business owners. Some wrongly assume that all businesses should suffer via recessionary cycles. But the truth is that some companies are usually essentially recession-proof, and it is not necessarily because they are much larger, better known, or a lot more generously capitalized.
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LLC's offer many benefits if you own a small business. They're easy to form and also help to protect the personal assets of the member(s). Operating and maintaining the LLC properly and following your states compliance statutes can help protect your personal assets. LLCs offer flexiblity and tax advantages that small businesses may find extremely beneficial.
Believe it or not if you want to form an LLC you will find it to be a somewhat simple process and it may be one of the best things that you ever do for your business. In fact all you will have to do is perform these simple steps to make it legal and a reality.
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