How do you want your business to be structured? Do you want it to be a Limited Liability Corporation (LLC) or an S Corp (based on the subsection S of Chapter 1 in the Internal Revenue Code)?
These organizational structures have their own unique features that can help you run your business efficiently, depending on the type of enterprise you run.
It is important to learn the differences and similarities between the two to determine which of them is more beneficial to your business.
Overview
Whichever forms you choose, the main idea for these organizational structures are to protect your businesses and your personal assets from creditors.
If you choose LLC, your liability will only be limited to the investment you put in the business. For example, if you put $10,000 in the company, you are potentially only liable for $10,000 by the creditors. This is one of the major advantages of using LLC for your business.
LLCs and S Corp also help you avoid paying personal and corporate taxes. These forms can also deduct the pre-tax expenses your business requires. But the S Corp form allows owners to pay themselves salaries and receive dividends from the extra profit that the corporation earns, while LLCs require all income and expenses to be reported to the operator of the business.
LLC Pros and Cons
LLCs have many features that make it very attractive. If you are an owner of a single member LLC, you don’t have to file a tax return; you only have to report the activity on your personal tax return. LLCs are also easy to set up, since it is usually just a single page form. It is also considerably inexpensive requiring only a couple of dollars to set up. There is less red tape involved in setting up LLC.
LLCs require you to pay self-employment tax, which means you have to pay the IRS every quarter. You must also make sure you don’t mix your LLC business transactions with your personal affairs to make sure they don’t pierce the “corporate veil.”
S Corp Pros and Cons
S Corps provides amazing benefits and opportunities to earn more for the company owners. One of the best things about S Corps is the “distributions,” which are tax benefits from the excess profit of the company. This form also deducts payroll expenses like FICA and federal taxes, because it follows the industry norms. The remaining profits will be given to the owners in the form of dividends, which are taxed at a lower rate compared to ordinary income.
The guidelines to setting up an S Corp organizational form, however, have more strict guidelines and costs more than setting up an LLC.
Stakeholders must always follow the rules for running an S Corp company to avoid being treated as a C Corp, which has plenty of downsides. There may also be additional state taxes for this form. Shareholders should make sure they only pay themselves a “reasonable” salary to be included in the industry norms. Plus, the gross receipts owners can receive from passive activities shouldn’t be over 25 percent.
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