In this LLC vs S Corporation article, we will highlight advantages of the LLC and S Corporation along with some key differences between the LLC and S Corporation. Many businesses now utilize the LLC business structure along with the S Corporation tax classification. In other words, you can have the best of both worlds.
Simplicity: An LLC is simple and inexpensive to set up.
Ease of Governance: Governance of an LLC is less burdensome than a Corporation.
Less Record Keeping: Annual meetings are recommended, but not required in most states. As such, there is less record keeping and paperwork involved with an LLC.
No Franchise Taxes: Many states do not impose franchise taxes on LLCs unless the LLC has elected to be taxed as an S corporation (or C Corp).
No Federal Taxation: Traditional LLC’s are not taxed at the entity level. The profits are passed through to the members (owners) and are taxed on their personal tax return.
Flexibility: An LLC has the flexibility to choose how it wants to be taxed. If it qualifies, an LLC can elect to be treated by IRS as:
S Corp;
C Corp;
Partnership (if it has more than 1 owner); or
Sole Proprietorship (if only 1 owner or the LLC is owned husband and wife in a community property state [e.g.,AZ, CA, ID, LA, NV, NM, TX, WA, & WI] and the spouses file federal taxes jointly).
Unlimited Owners: There is no limit to the number of owners you may have in the LLC (S Corporations must have less than 100)
Foreign Owners Allowed: Foreigners can own a US LLC (nonresident aliens cannot own an S Corporation)
Corporate Owners Allowed: LLCs can be owned by other entities (S Corporation must be owned by individuals)
Tax Savings: There are possible tax savings as an S corp. You may give yourself, now called the shareholder, a reasonable salary and pay the payroll taxes (approximately 15%) on your salary, then you may take the rest of the income the S corp made that year as dividends (which are not subject to payroll taxes). Note that an LLC may elect to be treated for IRS purposes as an S corp if it qualifies.
Credibility: Older generations tend to attribute more credibility to corporations.
History: Corporations have been around for many years, so courts and legislatures have had more time to develop the laws. LLCs were first recognized in the 1970s.
Shared Advantages
It is important to note that in a few cases, both LLCs and S Corporations share some of the same advantages:
Personal Liability Protection: Both an LLC and an S Corporation keep the business separate from the owners, and give the owners personal liability protection for business debts, obligations, and legal disputes.
Perpetual Existence: Both an LLC and an S Corporation can have “perpetual existence” that is, they typically last even after the owner or owners have passed away.
Multiple Owners: Both can have one or more owners, although an S corp cannot have more than 100 owners.
Credibility: Both give the owners of the business much more credibility in the day to day business with customers, vendors, and banks, since it appears the owners in both these business entities have more of an interest invested in their company.
Pass Through Taxation: Both the LLC and S Corporation are pass through entities (federal taxes are not levied on the entity…only its owners).
Please note that tax issues are complex. As such, you must not rely on this article or website as tax advice. This website and/or article above is not a substitute for the advice of an attorney or tax professional. According to IRS Circular 230 to ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this writing was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any matters addressed herein.
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