To maximize your business benefits and tax advantages, it is important to choose the right method to use in forming your business. Two of the more popular ways to organize your business are as an S Corporation or as a Limited Liability Company (LLC). This article will provide you with a brief overview of both, including the pros and cons of each one.
What is an LLC?
LLC is short for Limited Liability Company. An LLC is organized much like a sole proprietorship or general partnership. For tax purposes, it is referred to as a “pass through entity”, meaning that profits and losses pass through the business and onto the owner(s) of the business. The members of the business then report the profit or loss on their personal tax returns. What sets an LLC apart from other formations is that the ownerâ€™s risk or exposure is “limited” to the amount of his or her initial investment which they put into the business. This type of formation appeals to many business owners because the red tape is greatly reduced when compared to a C Corporation or other options. The members of an LLC also have flexibility when it comes to determining which employees contributed in which ways. This helps with profit sharing. There are limitations, however. An LLC owner is required to contribute a self-employment tax to Medicare and Social Security, and an LLC generally dissolves when a member passes away.
What’s an S Corp?
A Subchapter S Corporation is named after the Subchapter S section of the IRS tax code. An S Corp can have some tax benefits. For example, rather than being responsible for the self-employment tax (which happens in an LLC), a shareholder in an S Corp is only responsible for his or her wages as it relates to the self-employment tax. Unlike an LLC, an S Corp is more prepared to continue on with business if one of the members passes away. The downside, however, is that there are more s to prepare and file. These forms are due throughout the course of the year.
Ultimately, your unique business situation will dictate which option is the best choice for you. Depending on your size, desired flexibility, anticipated profits, and concern for liability exposure, one of these business entities may be more suitable for you. A good business law attorney can help you make the right choice and prepare the proper forms.