Almost every new business idea eventually gets to the important question:
Should you be an S Corp or LLC?
The two options are very similar, yet their key differences can make all the difference for your business.
But when it comes down to S Corp VS LLC, which one do you choose and why?
What is the real difference between LLC and S Corp anyway?
That’s what I’m here to answer today and I hope that you’ll find the following informative and helpful as you make your decision – LLC vs S Corp.
As always, I’m here to answer any questions or help you with the process as you incorporate.
Just drop me an email at [email protected] and I’ll get right back to you.
Let’s get started…
Why Would You Choose an S Corporation?
You may decide to choose an S Corporation for your business because it has certain tax advantages that could save you a lot of money across the life of your business.
An S Corporation has more requirements than an LLC, which can lead to a lot of stress if you don’t know what you’re getting into.
The thing to remember is that an S Corp not only offers those certain tax advantages, but it also creates even more separation between you and your business.
In the future, an S Corp is more suited for sustaining a very successful or growing business than an LLC is. So one of the main things to consider is your company’s visions.
In some cases, it is better to just start with an S Corp versus trying to convert to an S Corp from an LLC later once your business has taken off.
There isn’t a one-size fits all answer and it very much depends on your situation.
Instead of guessing and hoping for the best, contact me at [email protected] and we’ll talk through what makes the most sense for your business.
Why S Corporation is Better?
An S Corporation is better than an LLC in some cases because it can offer you tax savings and it creates more separation between you and the business.
There are certain things about an LLC that may make it not right for your situation, thus making an S Corp a better choice.
- Double taxation with an LLC
- Distinguishing you from your LLC business – if you’re not careful and get your personal affairs mixed up with your business affairs, you could lose the protection than the LLC provides.
So, really, an S Corporation is better if an LLC doesn’t fit your business as well, if you want to save money on taxes, and if you want to create distinct separation between you and your business that will protect you from lawsuits and debts in the future.
Why Would You Choose an LLC?
You may want to choose an LLC for your business because an LLC is a much simpler entity to form and to maintain compliance.
An LLC doesn’t require all of the paperwork to form – in most cases, you can do it with a single page. Additionally, LLC fees are cheaper than other corporation fees at startup.
As a new business owner, an LLC is very appealing.
It really takes all of the complications out of incorporating your business, but still lets you look like a company and have some protections from your business in most cases.
Another thing to consider is the type of business you plan to run. If your business is strictly online, an LLC is usually a great fit and makes the most sense.
And then there’s the fact that you can actually be an LLC while enjoying S Corp status. That’s basically the best of both worlds and allows you to save money on your taxes.
Let’s talk through if an LLC will be right for your business – just drop me an email at [email protected] today.
Why an LLC is Better?
An LLC is better than an S Corp in some cases because it is easy to start up and easy to run.
There’s less red tape to get through and few requirements to keep the business going.
Let’s a take a look at some of the requirements of forming an S Corp that aren’t an issue when you form an LLC:
- Must be a United States citizen or resident
- The business can only have up to 100 shareholders
- You can only issue one class of stock
- Profits and losses in the business have to be distributed proportionately across the shareholders based on their ownership percentage
- The business can only have up to 25% of its gross receipts created from passive activities
- S corporations must be careful about a reasonable salary because the IRS pays close attention – you are required to pay a reasonable salary to yourself and your shareholders based on industry standards and personal involvement.
An LLC is just a great way to form a business while having the protections from the business. It’s not the best choice in all cases, so consult with your business lawyer to determine if an LLC is better for you.
Email me here: [email protected]
What’s the Difference Between LLC and S Corp?
The main difference between LLC and S Corp comes down to ownership, formalities, and taxes.
Let’s look at each difference in more depth:
The IRS doesn’t restrict ownership of an LLC, but S Corporation ownership is restricted to individuals who are a US citizen or resident.
LLCs can have an unlimited number of shareholders while an S Corporation can only have up to 100.
S corporations have further restrictions on ownership – other C Corporations, S Corporations, LLCS, trusts, and partnerships can’t own an S Corporation. This restriction doesn’t apply to LLCs.
S Corporations are required to adopt an operating agreement, issue stock, hold initial and continual meetings with directors and shareholders, and follow any applicable internal formalities to keep the business compliant.
LLCs are recommended to follow some of the above formalities, but it’s not required.
LLCs can elect to have owners or managers manage the company. If the owners of the LLC manage it, it runs a lot like a partnership.
If managers manage the LLC, it runs more like a corporation where the owners aren’t a part of daily business decisions.
Whereas an S Corp has directors and officers. The directors oversee major business decisions while the officers manage daily business matters.
Some states require an LLC to list a dissolution date or dissolve upon withdrawal or death of a member. Additionally, members can’t freely transfer their shares of the LLC without approval of the other owners.
With an S Corporation, the stock can be freely transferred and the S Corp exists beyond the decision of a single member.
When it comes to taxes, an S Corp is more preferable over an LLC due to self-employment taxes.
An S Corp saves on taxes because an owner can be treated as an employee and paid a reasonable salary and income after the salary may be able to be classified as unearned income that isn’t subject to self-employment taxes.
Before you assume that you’ll save loads of money with an S Corporation classification, you should talk with your accountant or financial advisor to learn how the taxes laws will apply to your situation.
How is an LLC and an S Corp the Same?
An LLC and an S Corp are the same when it comes to limited liability, taxation, and entity status.
An LLC and S Corp both offer limited liability protection to the owners. This means that you won’t be responsible for the business debts or lawsuits in most cases.
Furthermore, the taxation structure of both are the same in that they are both considered pass-through entities. Basically, you won’t pay income taxes at the business level but the personal level instead.
Both an S Corporation and LLC are considered separate legal entities and are created by a state filing.
Finally, an S Corp and LLC are both required to follow certain ongoing state requirements such as annual fees and reports. An S Corp has more requirements than an LLC, however.
When it comes to S Corporation vs LLC, I can answer any questions you may have when you email [email protected].
How to Convert LLC to S Corp?
To convert an LLC to S Corp, you need to file paperwork that asks the IRS to re-classify you and then file a form to elect for S Corp taxation treatment.
Before you learn how to convert LLC to S Corp, you should know that some restrictions apply. In other words, not all LLCs can convert to S Corporations.
The restrictions are:
- LLC must not be a foreign entity
- LLC must have only one class of stock
- LLC must have less than 100 members that are shareholders
- Shareholders must not include corporations, non-resident aliens, or partnerships
- Not all professions and industries can form an S Corp. For more information, contact me, a business lawyer
The first step to convert LLC to S corp may be reclassification depending on your situation. If your LLC is being taxed as a partnership or sole proprietorship, you will need to ask the IRS to reclassify you as a corporation.
To reclassify your LLC, you should fill out Form 8832 and mark the box that indicates you want to be taxed as a corporation.
Next, you need to file Form 2553 to be treated as an S Corporation.
Here’s what you need to know about filling out Form 2553:
- If you want it to take place in the same tax year, you must file it within the first 2.5 months of the new year. Otherwise, it will take effect the following tax year.
- All members who have a share in the LLC must sign the form.
- Once your new tax status is active, you will file Form 1120s as the tax return for the business.
You may decide to be treated as an S-Corp to avoid self-employment taxes and save a little money in that area. Keep in mind you will have to pay a reasonable salary and pay taxes on that.
One final note when it comes to converting your LLC, you will not need a new EIN number for your business.
If you need any help with the process to convert LLC to S Corp, please email me at [email protected] today.
Sam Mollaei, Esq., Business Lawyer
Now that you’ve read the whole article about LLC vs S Corp, which one do you think is better for your business?
This article took an in-depth look at the differences between S Corp and LLC, including LLC vs S Corp taxes.
But that doesn’t necessarily mean you feel comfortable making the decision, does it?
It can be a tough decision because it is an important one. The complexity of legal and financial matters doesn’t make it any easier.
► Reach out to me at [email protected] and I’ll help you determine if this is a good move for your business and then we’ll start the process.