Advantages of LLC vs. an S-Corporation

By David Carnes

A limited liability company (LLC) is a form of business organization authorized by state statutes to accommodate business needs for limited liability, pass-through taxation and operational flexibility. An S corporation is a corporation that enjoys limited liability, as well as pass-through taxation under Subchapter S of the Internal Revenue Code, as long as it meets certain standards. Each type of entity offers certain advantages.

A limited liability company (LLC) is a form of business organization authorized by state statutes to accommodate business needs for limited liability, pass-through taxation and operational flexibility. An S corporation is a corporation that enjoys limited liability, as well as pass-through taxation under Subchapter S of the Internal Revenue Code, as long as it meets certain standards. Each type of entity offers certain advantages.

S Corporation Restrictions

One advantage of an LLC over an S corporation is that S corporations are subject to a number of IRS restrictions. An S corporation may not have more than 100 shareholders and may not include corporations, partnerships or non-resident aliens among its shareholders. S corporations are also prohibited from engaging in certain industries such as insurance. If an S corporation violates any of these restrictions, such as adding its 101st shareholder, it loses its S corporation tax classification. None of these restrictions apply to LLCs.

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Corporate Formalities

An S corporation is subject to the same corporate formalities that apply to any other corporation. It must establish a board of directors, hold shareholders meetings, and keep minutes of all board and shareholders meetings. State law regulates corporate voting rights, operational procedures and share transfers. Although state law also restricts LLCs, regulation is far less restrictive for LLCs than for corporations. In some states, for example, an LLC owner, known as a member, may assign the economic benefits of his interest in the LLC to an outsider, yet keep his voting rights.

Tax Options

An LLC enjoys flexibility in its taxation options. In default, an LLC will be treated as a partnership by the IRS, or disregarded entirely if it has only one member. Under certain circumstances, however, it is possible for an LLC to lower its tax burden by choosing to be treated as a corporation for tax purposes. The IRS will allow an LLC to be taxed as either an S corporation or, if it does not qualify for S corporation tax treatment, as a C corporation. An LLC may change its tax treatment every few years, as business needs dictate.

Self-Employment Tax

The IRS assesses self-employment tax on self-employed persons in lieu of the Social Security and Medicare taxes that employers would otherwise deduct from their paychecks. Unless an LLC elects corporate tax treatment, LLC members are treated as self-employed by the IRS. They are subject to self-employment tax of up to 15.3 percent of their allocated share of LLC income, even if the LLC distributes no income to its members during the tax year. By contrast, S corporation shareholders are subject to Social Security and Medicare taxes only if they are also employees of the corporation and even then, only on income they receive as salary; dividends and undistributed corporate income are not subject to these taxes.

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Tax Differences of LLCs & PCs

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What Are the Tax Advantages of LLCs?

A limited liability company, or LLC, is a business entity that has the advantage of offering personal liability protection for its members: LLC members cannot be held personally liable for the debts or obligations of the company. LLCs are also attractive to new business owners because LLCs enjoy many tax advantages as compared to other entities such as corporations and partnerships.

What Are the Benefits of a S Corp Vs. an LLC?

Minimizing tax obligations and limiting legal liability are among the most important factors to consider in choosing a legal structure for your business. Depending on your particular circumstances, either an "S corporation" or a limited liability company, also called an LLC, may provide the most advantageous structure for your business.

Tax Planning for an S Corporation

If you incorporate or create a limited liability company (LLC) for your small business, you may be able to designate it as an S corporation for federal income and self-employment tax purposes. Most of the income tax planning for an S corporation will be of more use to a corporation than an LLC, but LLC members still stand to save a substantial amount of self-employment tax with an S corporation election.

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