The legal structure you choose for your business should be in consideration of the risks and benefits it offers. Simply because a business structure has a few advantages over another, it is not prudent to adopt a business structure without weighing the pros and cons carefully. Likewise, choosing between an LLC or an S Corp depend on your business activities. Both the legal forms LLC or S Corp offers limited liability protection to its business owners, members in LLC and share holders in S Corp. Basically the holding structure is significant in adoption of LLC or S Corp for your business.
Limited Liability Company or LLC can be constituted with a single or multiple members under state statute. LLC is a relatively new form of business structure. Internal Revenue Service has not created a new tax classification for LLC. A LLC is still classified as a Sole Proprietorship, Partnership or Corporation for taxation purposes and the choice to elect the tax classification is left to the members. LLC members can be natural persons, other business entities and even aliens. In most of the states there are no restrictions on ownership. LLC provides the benefit of limited liability as a corporation with the flexibility of management and operations as a Partnership. LLC can elect to have pass-through taxation as in a partnership or sole proprietorship. Members can report their pro rata share of the LLC profit or loss in their personal tax returns and pay tax if applicable. Unless otherwise restricted in the Articles or Organization or Operating agreement, the membership in a LLC is easily transferable.
An S Corporation is no different from a C Corporation in form and structure. S Corporations are constituted by shares, which are easily transferable unless otherwise restricted in the Articles of Incorporation. The ownership has a few restrictions. S Corporations cannot have more than 100 shareholders; all shareholders must resident citizens and natural persons. There can only be one class of shares and dividend has to be distributed in proportion to the share holding. The main difference between a C and S is in taxation. C Corporations are subject to corporate taxes and have to pay tax on its profits. When the profits are distributed as dividend to share holders, they have to pay income tax on that which essentially is double taxation. S Corporations do not pay corporate tax but the shareholders report the profit in proportion to their share holding in their personal tax returns and pay tax. In LLC Vs. Corporation, the major advantages of LLC lie in its unrestricted ownership and flexibility in management. Corporations are subject to many formalities in incorporation and operations.
