LLC Vs S Corp

Learn The Difference Between LLCs and S Corps, And How Making The Right Decision Can Save You Thousands

In case you already don't know it an LLC is also called a limited liability company. These types of business entities can be very flexible and useful for people looking to own their own business. S Corp stands for Subchapter S, the term used for a corporation that is validly formed under subsection S of the first chapter of the internal revenue service code of federal regulations. Knowing about these entities and how they are different can be of great assistance to people who are looking to form legal entities for business purposes.

Starting a new business can be a daunting and difficult task, especially if it is your first business. Most business owners know they should be using some kind of business entity to assist them in the operation of their business and shielding their personal assets, but which one is the best one? Two very popular entities used in business today are the LLC and S corp, even though they are very similar, they do have some major differences, and picking the right one can save a lot of headaches down the road. So which one is the best one? That depends on your situation, so we have spelled out some similarities and differences below so that you have more information to make your decision. There are of course very technical and varied answers to this question, but we would like to provide a simple over view for people that gets straight to the point for most business owners.

How They Are The Same

These legal entities are very similar in the advantages they provide business owners. One advantage that these entities can provide is that they may shield personal assets from debt, lawsuits, and other liabilities that may arise from the operation of the corporation. What this means for most business owners is that they cannot be held personally responsible for the debts of the company keeping their personal finances separate from their corporate operations. Another reason why these two entities are very popular is because they are both known as pass through entities. One problem that some business owners can experience when owning a company is known as double taxation. This means that when the company makes money it is taxed, but then when the business owner pays themselves income from the business, it could be taxed again as personal income. Most people are not eager to pay taxes twice. That is why these are two of the most popular entities, they enjoy tax status known as single taxation, meaning that gains can be passed through to the owner as distributions or dividends and only be taxed once.

How They Are Different

There are differences between LLCs and Subchapter S corporations. An LLC is extremely flexible on who can be an owner and how income and dividends can be distributed. A limited liability corporation can also be owned by another business entity such as another corporation. For ease of use and flexibility an LLC can be an excellent choice. Subchapter S corporations by comparison have more restrictions. They must follow the same rules other corporations have, such as having the same record keeping obligations and voting requirements other companies have. S corps are also limited in how many people can be shareholders and how income is disbursed, severely limiting the way money can be paid out to shareholders. So why would anyone choose an S corporation over an LLC with the extra requirements and restrictions? In the right business situation the owner of a Subchapter S corporation can choose to have some funds distributed so that they can minimize FICA and other self-employment taxes. LLCs and other types of corporations are usually forced to pay these self-employment taxes which can be as high as 15.3%. Being able to legally avoid this taxation can make the extra work worth while in using a subchapter S corporation.