Corporation or LLC?
business owners structure their companies
as S corporations or limited liability
companies (LLCs). On the surface there
are several similarities. Both types of
entities avoid corporate income tax. Instead,
business income is taxed only once, on
the tax return of the S corporation shareholder
or the LLC member. Moreover, both S corporation
shareholders and LLC members have limited
liability: their financial exposure from
the company's operation generally is no
greater than the amount they invest and
any notes they personally sign. (In exceptional
circumstances, creditors may gain access
to additional personal assets of the business
Nevertheless, there are differences between
the two structures, which you should consider
when choosing between them.
In some ways, an LLC resembles a sole
proprietorship or a partnership, but with
the advantage of limited liability. Usually,
you can form an LLC with relatively little
paperwork. Once an LLC is operating, there
may be few tax returns to file and other
recordkeeping and reporting requirements
for LLCs are generally less burdensome
than for corporations. If an LLC has multiple
members, the business has a great deal
of flexibility in how any profits are
distributed among them.
downside is that an LLC may have a limited
life. Depending on state law and the operating
agreement, the death of a member may dissolve
the LLC, for instance. In addition, taxes
might be relatively high for LLC members.
That's because all net income of the LLC
is passed through to members as earned
income on their personal tax returns,
per the LLC agreement. The members are
treated as if they were self-employed;
they owe the employer and employee shares
of items such as Social Security and Medicare
tax, with a relatively small deduction
as an offset.
Even after making an election to be taxed
under Subchapter S of the Internal Revenue
Code, an S corporation is still a corporation.
There are meetings that must be held,
minutes that must be kept, and extensive
paperwork to process. Such efforts can
be time consuming and expensive.
addition, S corporations must meet certain
requirements. A business with more than
one class of stock or a shareholder who
is not a U.S. citizen or resident can't
be an S corporation, for example. Similarly,
an S corporation can't make disproportionate
distributions of dividends or losses.
the plus side, S corporation shareholders
can receive a salary, on which they owe
payroll tax, and dividends, on which they
don't. Although artificially low-balling
a salary will draw the ire of the IRS
(see the August 2014 issue of the CPA
Client Bulletin), S corporation owners
may pay thousands of dollars less per
year in payroll taxes than LLC members
pay on similar company related income.
What's more, S corporations can be long-lived,
and this permanent nature may make them
more attractive to lenders and investors
than potentially short-lived LLCs.
Choosing or combining
Your choice of business structure may
come down to whether you prefer the simplicity
and flexibility of an LLC or the potential
tax savings and lender and investor appeal
of an S corporation. State laws vary,
so a tilt in one direction or another
may influence your decision.
another possibility is to set up your
business as an LLC and then request S
corporation taxation by filing IRS Form
2553, "Election By A Small Business
Corporation." Our office can go over
your specific circumstances to help you
decide how to structure your company.
Source: October 2014 AICPA Client Bulletin