Financial advisors who are setting up a new practice or re-evaluating their choice of business structure for an existing practice might want to consider the differences between an LLC vs. S Corp. What are the advantages of each? How can your business choose a corporate structure to maximize the available tax deductions for financial advisors while best avoiding the possible risks and downsides?
The decision is not simple, and there are many similarities between an S Corporation and an LLC. However, in general, many financial advisors will be better off choosing an LLC instead of an S Corporation.
Here are a few of the key reasons why you should choose an LLC instead of an S Corporation for your business structure:
Tax Advantages: Whether you set up an LLC or an S Corporation, both of them have one thing in common – they are both treated as “pass through entities” for tax purposes. That means that your LLC or S Corporation does not owe income taxes as a business entity; instead, the company’s profits and losses “pass through” to your personal tax return. This can help you avoid some of the corporate income tax that a C Corporation would have to pay, for example.
Flexibility: However, the LLC has several advantages over an S Corp in terms of the flexibility of the structure. The LLC gives the business owner more options for how to assign compensation, how to set up the ownership, and how to deal with the income from the business for tax purposes. For example, with an LLC, the business owner can choose to have the LLC taxed as a sole proprietorship, partnership, C Corp or S Corporation. With an LLC, you can get the tax treatment of whichever corporate structure you want, but without the other limitations of that choice of business structure.
Compensation for Principals: If you have a partner (or multiple partners) in your financial advisory practice, the LLC can also be a great choice because of the way it lets you assign compensation among the various principals in the business. For example, if there are two advisors that each own 50 percent of the financial advisory practice, but one of them brought it some big clients and deserves additional compensation, the LLC can make “guaranteed payments” on top of the advisor’s salary. The LLC also makes it easy to pay year-end bonuses to the owners of the firm.
Growth Potential: An LLC has no limit on the number of member-owners, while an S Corporation, by law, can only have a maximum of 100 shareholders. If you want your business to grow, an LLC gives you additional flexibility to make it possible.
Fewer Formalities: If you set up your business as an S Corporation from day one, instead of as an LLC, the S Corp is required to deal with more formalities of corporate regulatory compliance, such as having a board of directors and holding annual meetings and filing annual reports. If you are just a small, simple financial advisory business, all of these extra formalities are often unnecessary. The LLC gives you fewer hassles, greater anonymity, and possibly can offer you and your partners/members greater protection from personal liability in the event of a lawsuit, since members of LLCs cannot be enjoined in lawsuits against their companies.
With these points in mind, the LLC is almost always the best choice for financial advisors. It’s true that S Corporations have some unique advantages, but you can get the tax treatment advantages of an S Corp by electing to treat your LLC as an S Corp for tax purposes. Get the best of both worlds: set up an LLC for your financial advisory practice, and then use the flexibility of the LLC to file as whatever corporate entity makes the most sense for your income and overall tax situation.
Latest posts by Ben Gran (see all)
- If You Have a Series LLC, Does Each LLC Need Its Own Registered Agent? - December 18, 2018
- How Incfile Can Help You Form Your Nonprofit, 501 (c)(3) or Charity - December 14, 2018
- How to Be Your Own Registered Agent in Florida - December 5, 2018