What Are the Fundamental Differences Between an LLC and an S-Corp?

If you decide to start a small business, one of the most common decisions you’ll have to make  is how the business will be structured. There are several choices but the most common are  LLC, or  S-Corp? Read on to learn some of the major differences between the two, and learn how we can help you determine what’s best for your team.

llc

All about LLCs

According to the IRS, an LLC (Limited Liability Company) is a business structure designed to provide the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership.  What differentiates an LLC is the limit of the liability for which a business owner is responsible – which is typically the owner’s investment in the company.

One feature that distinguishes an LLC from an S-Corp is its ease of operation. There are far less forms required for registering, and startup costs are very low. LLC’s only have to file taxes once a year on April 15th, and they’re not required to have formal meetings and keep minutes. There are also fewer restrictions on profit-sharing within an LLC since owners have the freedom to distribute profits as they see fit.

What about S-Corps?

An S-Corp is a corporation that has received the Subchapter S designation from the IRS. An S-Corp differentiates from a traditional corporation by having the ability to have profits and losses pass through to a shareholder’s personal tax return. Anyone who works for an S-Corp must be paid fair market value, or the IRS might reclassify any additional earnings as wages.

A positive feature that sets S-Corps apart from LLCs is the tax savings. Owners of an LLC are subject to employment tax on the entire net income of their business – however, only the wages of the S-Corp shareholder who is an employee are subject to employment tax. The leftover income is paid to the owner as a distribution which is taxed at a lower rate – if at all.

Let Us Help You Decide

These are just a few of the major differences between a LLC and S-Corp. It is a complicated process, and it will have an impact on your business. Whether you’re thinking of starting up a small business or already have a small business, let our experienced business attorneys give you all of the information you need to decide what type of business structure you should operate under. Contact us anytime so we can help you find the best solution for your team.

 

Image courtesy of jasondirks/Flickr.

Pay Now