S Corp or LLC Which Is Better: Everything You Need to Know
S corp or LLC which is better is a common question amongst business owners.3 min read
S Corp or LLC Which is Better
S corp or LLC which is better is a common question amongst business owners. Before you form your business, you’ll want to know the advantages and disadvantages of operating as any type of business structure. But when it comes to the LLC and S corp, these two types of business structures do, in fact, share some similarities.
S Corp vs. LLC Similarities
There are many similarities between the S corp and LLC, including the following:
- Limited liability protection
- Separate legal entity
- Pass-through taxation
- Ongoing requirements
LLC owners and S corp shareholders enjoy limited liability protection. Therefore, they cannot be held personally liable for any debts or liabilities of the business. If a lawsuit is brought against the LLC, the plaintiffs can’t go after the owners’ personal assets, whether it’s their home, car, investments, or any other personal asset.
The LLC and S corp are separate and distinct legal entities from their owners, which is another reason personal liability protection exists. Furthermore, both entities operate as pass-through tax entities. As such, these companies don’t pay corporate income taxes but rather pass all profits, losses, credits, and deductions onto their owners who report it on their personal income tax returns. The business generally still files an information tax return, which specifically identifies the portion of profits that each owner is required to file on their income tax return.
Lastly, the LLC and S corp share certain ongoing state requirements, which could include filing annual reports, paying state taxes, and other requirements to the ongoing upkeep of the business.
Costs of Maintaining an LLC and S Corp
Generally, it costs more money to maintain an S corp over an LLC. This is due to the additional payroll taxes and state corporate taxes that an S corp must pay. Particularly, an S corp shareholder-employee must earn a reasonable compensation that is subject to state unemployment and disability tax for the business. With regard to the compensation paid to the shareholder-employee, keep in mind that not all shareholders in an S corp need to be paid a reasonable salary. This is only required if the shareholder is also an employee of the business.
A shareholder beingan employee of the business can occur if the shareholder completes a significant amount of work for the business and contributes to the overall operation of the company. An LLC owner, however, need not pay state unemployment or disability taxes, therefore reducing the tax implications for LLCs.
Factors for Choosing Between an S Corp and LLC
When determining which type of business structure is best for you, you’ll want to think about your short-term and long-term goals, along with other objectives for your business. If you want to have liability protection but also plan on finding outside investors for your business, the S corp is the right choice for you. Moreover, if you eventually want to become publicly traded and sell more than one class of stock, you’ll have to convert to a C corporation, since S corps only allow one class of stock and can’t become publicly traded.
Also, as previously noted, the S corp is not its own type of business structure. It’s a subchapter tax election within the corporate business structure. Therefore, the S corp has many other similarities with C corporation formalities.
You can also operate an LLC but elect S corp tax status for your LLC. Therefore, you will own and operate an LLC for structural purposes but simply be taxed as an S corp.
If you are looking to operate a company with fewer formalities, cheaper costs, and flexibility in management structure, then you will want to form an LLC. The LLC is also beneficial for owners who have no plans on selling stock, seeking outside investors, having ongoing meetings that require a record of meeting minutes, or other strict corporate formalities.
If you need help learning about the pros and cons of an LLC and S corp, or whether you should form an LLC or S corp for your business, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.