Advantages of an S Corporation Over LLC: Everything You Need to Know
Advantages of an S corporation over LLC is a comparison to consider due to the basic benefits of both when it comes to pass-through taxation and liability protection. 3 min read
2. Factors When Choosing a Limited Liability Company (LLC)
3. Recommended Steps
4. Considerations When Choosing
Advantages of an S corporation over LLC is a comparison to consider due to the basic benefits of both when it comes to pass-through taxation and liability protection.
Factors When Choosing S Corporations
Business owners with an S corporation realize certain protections that include personal assets not being included in any corporate liability issues. Income from the company is generally given as a dividend, which bypasses personal and corporate taxation.
Companies that have a larger and more complex business platform will usually choose an S corporation structure.
One of the advantages of an S corporation is the paying of salaries and dividends, which can have a positive effect on lowering the company's tax bill.
As a rule, an S corporation has a choice in accounting options. An S corporation can choose between accrual accounting and cash basis accounting while an LLC can only use accrual accounting.
Factors When Choosing a Limited Liability Company (LLC)
An LLC provides owners with several advantages such as protection from rulings handed down in a court of law filed against the company, debts incurred by the company, and loss of the owner's personal assets.
With an LLC, the company is not faced with double taxation. Income earned by the company is then passed through the individual owner's tax return.
For owners whose business is small and structured to be personally managed, an LLC is an appropriate choice.
With an LLC, management flexibility is the focus. An owner preferring to do less paperwork, who does not have plans to acquire substantial outside funding, nor plans to go public with stock opportunities would consider an LLC.
LLC owners are required to pay self-employment tax, which can be significantly more of a tax liability whereas an S corporation does not pay self-employment taxes because it pays salaries and dividends.
Formal steps recommended for an LLC include the following:
- Creating and implementing an operating agreement
- Holding annual member and manager meetings that are documented
- Issuing company shares to members
- Documenting decisions made by the company
S corporations also have recommended steps, including:
- Adopting a thorough set of bylaws
- Issuing stock
- Holding an initial director and shareholder meeting
- Holding annual meetings for the director and shareholders
- Keeping thorough minutes of all meetings
Considerations When Choosing
- When deciding on the structure that best suits your business approach, a consultation with an attorney is recommended. Speaking with an accountant is a good idea during the decision-making process.
- Although similar in their structure, there are differences between S corporations and limited liability companies. The similarities and differences vary by state.
- As the owner of a C corporation, owning stock in an S corporation is not allowed.
- An owner choosing the S corporation structure should be aware the "S" simply signifies the tax choice your company will follow. With an S corporation, the business is taxed following the guidelines of the Internal Revenue Service Code set forth in Subchapter S of Chapter 1.
- When filing taxes, a business tax form is required for an S corporation. An LLC only files a business tax return if there is more than one owner of the company.
- Individual taxes filed by an owner is based on what percentage of the company they own.
- Pre-tax expenses such as advertising, equipment, car expenses, travel, health care premiums, and uniforms can be deducted by an S corporation and a limited liability company.
- An LLC has the option of members (owners) or managers take on the responsibility of managing the LLC. An S corporation will have both officers and directors.
- An LLC that is managed by its members (owners) it is more like working within a partnership. If manager-managed, the business structure is more in tune with that of a corporation. With a manager-managed business, members do not participate in the daily decisions affecting the business.
- The rules of the Internal Revenue Service (IRS) tend to be more flexible with owners of an LLC than an S corporation.
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