One argument that you will find among businesspersons is the LLC vs S Corp. The LLC vs S Corp argument is designed to convince people that either the LLC or the S Corp is a better choice for a business structure. To help determine which structure would be better for your business you will need to learn about the advantages and disadvantages of each structure.
The first thing that comes to mind with the LLC vs S corporation argument is the how they are structured. In order to qualify as an S Corporation the corporation must have a maximum of 75 shareholders. The shareholders cannot be other corporations or businesses, the shareholders must be an individual. With an LLC, you can have as many members as you want; there is no minimum or maximum amount of members. Another advantage of the LLC is that the members of the LLC can be other businesses, including LLCs.
Another basic LLC vs S Corp argument that you will find is the S Corp has an independent life when compared to the LLC. With an LLC if one of the members dies or retires than the LLC is going to cease to exist. With an S Corp if one of the shareholders dies or retires the S Corporation can still exist. In most cases, the S corporation can continue with their normal operation of business without being disrupted by the death of one or more shareholders. With an LLC, you can arrange when first forming the business about what will happen to the LLC if one member wants to sell their share of the business, but in most cases the LLC dissolves and you must reform.
Another argument that needs to be considered when deciding between these two business structures is the LLC vs S Corp tax methods. Both the LLC and the S Corp allow pass through taxation, which is the biggest difference between the S corporation and a regular corporation. In an S corporation, the corporation is taxed like a partnership and the corporation pays no income taxes. The profit or loss is passed through directly to the stockholders. With an LLC, all of the profits, losses, and expenses flow through the company to each individual member. What most people are trying to avoid is the double taxation of the corporate structure, but in some cases that can be an advantage.
Another disadvantage that you face with an LLC is that you cannot take your business public. If you have any plans to take your business public in the future, no matter how far into the future that might be, it is in your best interest to avoid the LLC structure. If you choose an S Corporation, you will be able to take your business public and still reap the tax benefits of an LLC.
Another thing that comes up is the single member LLC vs S Corp argument. The reason that this comes up is people feel that a single LLC provides advantages over an S Corp or vice versa. The biggest difference between a single member LLC and an S Corp is the number of members or shareholders that each one has. An S Corp cannot be formed with only one member; where as the S Corp requires corporate officers and shareholders to run the business.
When starting a business one of the first decisions that you will need to make is what type of business structure you are going to use. The most popular business structures are sole proprietorship, partnership, LLC, corporations, and S corporations. To make your decision you will need to compare the various business structures to see which will provide your business with the most benefits.
Most people start looking at LLC vs corporations because of how close they are. With both LLCs and corporations, you will be awarded limited liability for your business. This means that you will not be personal responsible for any debts that your business owes unless you have signed a personal guarantee. The one mistake that people make in regards to the limited liability in both corporations and LLCs is that they think when forming a corporation they are protected from everything. Looking at LLC vs corporations shows us that both business structures are only protected to a certain extent, the limited liability protection is voided many times through credit agreements because the business is to new to have established its own credit.
The LLC Vs Corporation shows us the difference in how each business structure is taxed. The LLC vs corporation taxes show us that corporations are not as flexible as LLC taxes. The LLC vs Corporation argument on taxes is that corporations are double taxed, while LLCs allow flow through taxation. Corporations are double taxed because the income that the corporation makes is taxed, but so is any income that is passed onto the owner. With a LLC if you choose to be taxed like a partnership or a sole proprietorship you benefit from flow through taxation, which allows your business taxes to be affect your personal income taxes. For example, any loss from your LLC will lower the amount of your gross income on your personal taxes, with a corporation the loss can only be used to reduce the corporation’s income in the future or the past few years.
The cost to incorporate the business is another thing to consider in the LLC vs corporation argument. Registering an LLC is going to vary based on where you plan to register your LLC, but can cost anywhere from $100 to $400. The biggest cost you incur with a LLC is the filing fee for your Articles of Organization. For a corporation the cost to register can be a few hundred dollars for a small business, but much higher for bigger businesses. The reason that the cost is so much higher for corporations than LLCs is because of how complex the legal structure is for a corporation. Corporations have more requirements to meet than LLCs so the filing fees start to add up.
One might make the argument LLC vs S corporation is going to be better than just a regular corporation might, but that is not the case. While the S corporation does have its benefits when compared to a regular corporation, it still has the same drawbacks as a corporation. One of the biggest benefits of having an S corporation compared to a LLC is the employment tax. With a LLC you are considered self-employed so everything that the business makes is subjected to a self-employment tax. With an S corporation only the salary that you are paid as an employee is subjected to the employment tax, any money that is paid as a distribution of profits is not subjected to the employment tax.
The one thing that you need to remember is that LLC vs incorporation can have its benefits, but it can also have its downside. You need to carefully compare the advantages and disadvantages of each structure before making your final decision.
