Both an S Corporation and Limited Liability Company provide owners personal asset protection and pass thru tax treatment, but there are differences between the entity types to consider before making your decision.
- Rigid structure
- Shareholder Agreement
- Easier to sell shares
- Better suited for large numbers of owners
- Capital calls not common
- Shareholder requirements
- Limited to 100 shareholders (up from 75 previously)
- Shareholders can only be individuals or trusts (corporations, LLC, LP, etc. not permitted)
- Shareholders must be citizens or legal residents of the US (no foreign investors allowed)
- Only one class of stock permitted, but different voting rights allowed per shareholders
- A company tax return is required for the corporation
- Taxable income per shareholder determined by revenue generated by the company on a percentage basis of ownership and cannot be modified. Even if money is left in the company, the shareholder is still taxed on the revenue.
- You can avoid self-employment 15% tax (“SE Tax”) for money paid as a dividend as opposed to payment as a salary; although, you must incur payroll expenses and rile quarterly payroll returns which will cost $1,000-$2,000 per year. The tax savings pertaining to SE Tax would have to be over the cost for payroll expenses and returns before you realize a benefit. If predominate part of business is the sale of services or products set up as a S Corp. because this revenue would be subject to SE Tax.
- Owners must be paid a reasonable salary per IRS guidelines even if the company is losing money
- Can convert an S Corp. to a C Corp.
Limited Liability Company
- Flexible structure
- Operating Agreement which can include nonstandard contractual terms
- There is no requirement to disclose the officers or directors
- Capital calls are common
- Less formalities – Annual meetings not necessary
- Can be foreign individuals or companies
- Members can be corporations, partnerships, trusts, etc.
- No limitations on the number or type of members
- Different classes of membership units permitted
- All generated income subject to self-employment 15% tax (“SE Tax”). If only one member only file schedule C (sole proprietorship). If over one member, a Form 1065 partnership return (IRS K-1 is required).
- Salary to owners not required. If no employees, no need for payroll services.
- Only taxed on the income attributable to the member that received the revenue from the company
- Profits/losses to members can differ from ownership percentages
- If predominate income is from capital gains, rental income, or investments which wouldn’t be subject to SE Tax then it would be better to form an LLC.
- LLC can be converted to a corporation in the future if necessary
- Can elect S Corp. tax status if entity qualifies per IRS guidelines
Please call if you have questions about different business entities.