Monday, April 21, 2014

S Corp or LLC, Which One for Me?

How Both Are the Same:

The major benefits of both the LLC(Limited Liability Comapny and S Corp entity lies in the limited liability they offer owners.  Owners of these businesses are only liable for the capital they themselves have put into the company.  Your personal assets including your house and your car etc., are virtually untouchable if your company ever gets sued.  (This isn't always the case.  Depending on the situation "piercing the corporate veil" can actually occur.)

LLC's and S Corp's also benefit from having "pass-through" taxation by the IRS.  This just means that you don't have to pay corporation taxes and then pay taxes on the salary you received from the corporation, which is how a c corp works.  This is referred to as "double-taxation" and is one of the disadvantages of forming a c corp.

 You can also deduct pre-tax expenses with both of these business formations.  These would include travel expenses, uniforms, phone calls, computers for the business, car expenses and health care premiums.

The Differences: 

LLC:
There are many benefits alone for using an LLC as your business structure.  The major advantages include:
  • Very easy to create and maintain especially when compared to how an S Corp is formed.
  • Cost of set up is very low.
  • Flexibility in how the company is ran and how you want to be taxed.
One of the major disadvantage of LLC's is that you have to pay self-employment tax on any income generated from the business.  This means that you must pay quarterly tax payments to the IRS.

S Corp:

The biggest advantage that the S Corp has over the LLC is in how owners are paid.  The S Corp pays employees a "reasonable" salary, which just means congruent with industry standards, but you can deduct federal taxes and FICA.  After this, any remaining profits are distributed to the owners as dividends, which happen to be taxed at a much lower rate.

The disadvantages of forming an S Corp lie in just how strict the guidelines are in establishing this corporation.
  1. You must be a US citizen or resident.
  2. Corporation cannot have more than 100 shareholders.
  3. Can only have one class of stock.
It is also more expensive to form an S Corp.

Depending on what exactly your business does and what it will be doing in the future can greatly change how you want to form your business.  Make sure to look at all the factors when deciding which entity is best for your business.

If you are ready to form your business please visit Apex Legal Filings, LLC and they can help you.