Should You Form An S Corp Or LLC?

The LLC is a business entity that combines the personal liability protection of a corporation with the operational flexibility of a sole proprietorship or partnership. It is also designed to allow business owners some additional options when it comes to how the LLC will be treated for tax
purposes. The formation of an llc is rather simple 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.

When comparing the LLC remember that each entity offers benefits for your business but it’s up to you to weigh your options and make a decision on what will work 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.

About the Author:

Michael Jagoda has been an online business owner since 1996 and has over 12 years experience incorporating businesses and forming llc’s. He currently owns and operates http://www.startbizhere.com an online incorporation an llc formation service.