S-corp or LLC?

Posted by Dave Dunn on September 23, 2008 | 0 Comments

Tags: Accounting, Small Business

S corporations and LLCs have a lot in common and therefore often appeal to the same people. Two major things S-corps and LLCs have in common are:

• both provide protection against liabilities
• both enable the owners to avoid double taxation as business losses and profits pass through to the owners.

The decision between an S-corp and an LLC usually comes down to two significant differences:

• Employment Taxes
  Owners (members) of an LLC must pay employment taxes on all profits passed through to their individual tax return. Owners of an S-corp, however, only pay taxes on the salary and wages they receive from the S corporation. If you expect to generate significant profit or your LLC is already generating a lot of profit, this difference alone can make it worth starting up as or switching to an S-corp. It is important to note, however, that owners of an S-corp are required to take a reasonable salary for the services they perform and the IRS may recategorize distributions made as salary if they don't feel the owners have done so.
• It is Easier to Start and Operate an LLC than an S Corporation
  It is simpler to start an LLC than it is to start an S-corp and, once operating, LLCs do not require regular corporate meetings and maintaining company minutes, both of which are required by S-corps.

If you are debating between an S-corp and an LLC, then it probably comes down to how much profit you expect to make and whether or not you can reasonably argue that some of that profit should not count as your salary. If this is the case, then consider an S-corp. If not, then it probably makes sense to go with the simpler LLC. It's not difficult to switch from an LLC to an S-corp, so it often is best to keep things simple at the beginning and then switch to an S-corp later if it makes sense to do so.

Finally, choosing the best business structure for you business is not easy. While I hope this blog entry helps you understand and consider the differences between LLCs and S-corps, I recommend seeking guidance from your accountant or attorney before making a final decision.