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LLC vs. S Corporation

S-Corporation vs LLC: Which Is Best for Your Business?

For many business owners, selecting the right entity comes down to a choice between the limited liability company (LLC) and the S Corporation. These are the two most common forms of small business incorporation. While quite similar in many respects, LLCs and S Corporations both have advantages over one another. Which one is right for your business?

How LLCs and S Corps Are Similar

LLCs and S Corporations share the same “separate entity” status enjoyed by corporations (meaning the company is a separate entity from its owners). This offers liability protection from the many risks of doing business.

How LLCs and S Corps Differ: Profits and Voting Power

An S Corporation divides profits between its shareholders evenly. Someone with 30 percent of the stock would receive 30 percent of the profits, while another with 10 percent of the stock would receive 10 percent of the profits, and so on.

This is not the case with the LLC. In an LLC, the members (akin to stockholders, although LLCs usually issue “member units” as opposed to common stock) decide how profits should be divided. There may be someone with 10 percent of the “stock,” but they put in 30 percent of the work. This stockholder can receive more than what they have invested if the other members agree that they deserve it.

The same goes with voting power. S Corporations follow a more traditional structure in which voting power is determined by stock ownership. An LLC can give more or less voting power to stockholders regardless of how much stock they may own.

The Benefits of an LLC

There are several benefits to forming an LLC instead of an S Corporation. There are fewer requirements for this more flexible business entity. You can almost think of an LLC as a marriage between a classic small business (partnership/sole proprietorship) and a corporation. Forming an LLC offers you:

  • No ownership restrictions – virtually anyone (individuals, corporations, other LLCs and even foreign entities) may be owners of an LLC
  • The ability to operate with a single member
  • No required annual meetings
  • Pass-through taxation: The net income/loss is “passed through” to the personal income of the owner(s)/member(s), and is simply taxed as personal income. An S Corporation has separate ownership provisions. The S Corporation is limited to 75 shareholders all of which are required to be U.S. citizens. They are also required to hold shareholder and corporate meetings, which can affect record-keeping needs and continuity within a company.

The Benefits of an S Corp

If you have employees that you provide benefits to, an S Corporation will get better deductions in regards to benefits (health insurance, disability and more.)

In addition, an S Corp's individual shareholders split the income (or losses) amongst each other and report it on their own personal tax returns. The owners of an S Corporation pay regular income tax on their distribution, but since they are not self-employed, they pay no self-employment tax on this distribution.

Have you been in business for a long time, with no end in sight? An S Corp may be a better choice for you as LLCs may have a limited shelf life. Some states have a cap on how long they can stay in business (30 years, etc.)

Choose the Right Business Entity to Protect Yourself (and Your Profits)

Overall, S Corporations allow for more shareholder uniformity and tax savings, while an LLC allows more free negotiations and possibilities for ownership and accountability. Choosing which one is right for you depends on the unique needs and goals of your business.

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