LLC vs S Corp? Which should you chose if you are starting a business? You have probably heard of both types of entities, but you may not know much about either. The LLC stands for Limited Liability Company. The S Corp stands for a type of Corporation. Choosing a business entity is an important part of setting up a business. One of the biggest mistakes you can make is to not pay attention.
A limited liability company is a legislative creation that enables a small business to get the liability of a Corporation with the ease of management of a partnership. It is basically a hybrid of those two business entities. The LLC is an excellent choice for a small business. It has the advantage of double asset protection. This means that if is structured correctly, if one of the members gets into personal trouble the company can be protected from their creditors.
S Corporations are Corporations that have the liability protection of a Corporation, plus special tax advantages. Shareholders of an S Corp can choose to pass Corporate income, losses, deductions and credit through to their own tax returns. This means the S Corp can avoid double taxation on the Corporate income.
Liability Protection LLC vs S Corp
When it comes to liability shielding, the LLC vs S Corp characteristics are basically identical. However, the LLC does give you “charging order protection” or double asset protection that the S Corp alone can’t give you. If you are interested and want to learn more about this type of protection, I recommend my e-Book, How to Double Your Asset Protection. It has a full explanation of relevant information to help you make an informed decision.
LLC vs S Corp – Less Formalities
Considering “ease of operation,” the LLC vs S Corp discussion leans a little in favor of the LLC. The LLC generally has fewer “formal” operational requirements. For example, the annual meeting you need to have in the Corporations isn’t as “critical” for LLCs.
However, you need to establish that either entity, the LLC vs S Corp choice, isn’t your alter ego, so you need to treat them formally, no matter which entity you choose. But, if you’re making the LLC vs. S Corp decision, know that the LLC is more forgiving if you don’t follow the formalities as strictly.
How do I choose between LLC vs S Corp
You may be thinking how do I choose between LLC vs S Corp? I am here to tell you that it’s not a decision you need to make. The good news is that in an LLC, you can have your cake and eat it too.
Your LLC can qualify to be taxed as an S Corp. In other words, if none of the members are partnerships, corporations or non-resident alien shareholders and you have no more than 100 shareholders and only one class of stock, your LLC can elect to be taxed as an S Corp.
To have your LLC get the S Corp tax treatment, you simply have to file Form 2553 with the IRS, “Election by a Small Business” signed by all the shareholders. Once you file, the differences between these entities is pretty much a non-issue, as least as far as the “taxes” of the owners is concerned.
Conclusion
The LLC is a great choice for a small business. If you are vacillating between the LLC vs S Corp decision, the LLC would be the best choice in most cases. If most of the income from your business is “earned income,” then it would be a good idea to file an S Corp taxing structure with the IRS. If most of it is passive income (rents, royalties, etc.) then you might want to have your LLC taxed as a partnership.
