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

By Chris Blank

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.

Limited Liability Company

The term "limited liability corporation" is often mistakenly used to refer to an LLC, according to the Free Legal Dictionary. Unlike a corporation, an LLC does not have the legal status of a "person." The individual members of an LLC are considered its owners; LLCs do not issue stock. LLCs file Articles of Organization with the state where the company is located. Although it's not required, an operating agreement determines the distribution of profits and the responsibilities of each member. Businesses such as banks and insurance companies are prohibited from forming LLCs. In some states, a single individual may structure her company as an LLC.

LLC Advantages and Disadvantages

LLCs avoid the "double taxation" of corporations, which pay company taxes and whose stockholders also pay taxes on dividends. The earnings of an LLC pass through directly to its individual members, who pay individual federal and state income taxes. LLCs also provide legal protection for the personal assets of their members against liability for business-related activities. Members of an LLC must pay self-employment tax, according to the IRS. Some states do not allow companies to form LLCs. Other states require the dissolution of an multi-party LLC when one member dies or leaves the company.

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S Corporation

A small business corporation, also known as an "S corporation," is one that has obtained Subchapter S status from the IRS. The IRS recognizes S corporations as separate legal entities that pay wages and make distributions to the members. Each S corporation must establish itself as a legal corporation in the state in which it operates, then apply for recognition with the IRS. S corporations schedule board and stockholder meetings and adopt bylaws like conventional corporations.

S Corporation Advantages and Disadvantages

S corporations avoid the double taxation of conventional corporations by not having to pay corporate income taxes. Members of S corporations who work for the company pay individual taxes on their wages, but not self-employment taxes. Stockholders who are not employed by the company pay taxes only on their dividends, which are often taxed at a lower rate than wages. Members of an S-corporation enjoy legal protection for their personal assets against liability for actions related to company business. The IRS places strict limitations on these corporations, which may have only 100 members and issue one type of stock. Partnerships, corporations or individuals who are not legal U. S. residents may not be members of an S corporation, and some states do not recognize S corporation status, while others impose stiff tax liabilities on the earnings of these corporations.

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LLC Vs. Company
 

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Difference Between an LLC & a Corporation

The limited liability company (LLC) and corporation both establish the company as its own entity with a legal existence separate from that of its owners, who are called "members" in an LLC and "shareholders" in a corporation. Both business forms provide limited liability from suit for the torts of company employees or other members or shareholders. Despite their many similarities, however, there exist several important differences.

LLC Vs. S Corporation in Kentucky

One of the most important decisions to make when you start a business is what business structure to use, and there are several to choose from in Kentucky. Two common structures are the limited liability company and the Subchapter S corporation. Both forms offer similar liability protection, but have different formation requirements, structures and rules for operation.

How to Setup Directors in an S Corp in California

An S corporation, similar in many ways to a standard C corporation, elects to be taxed as a pass-through entity by the Internal Revenue Service rather than to pay corporate income tax. When you file articles of incorporation in California, you must also file Form 2553 with the IRS to confirm the S corp election. Corporate statutes, in the state where a business is formed, govern S corporation management. As such, California corporate law sets forth the rules for setting up a board of directors.

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