By: Esqueda Law PLLC
An S-Corporation is a corporation that meets the specific requirements of the Internal Revenue Code. This requirement usually gives a corporation having one hundred shareholders and below the benefit of incorporation and being taxed the same to a partnership. The corporation is allowed to pass income directly to its shareholders to avoid double taxation.S-Corps are required to have only one class of stock.
A limited Liability Company(LLC) is a business structure that is allowed to combine the pass-through taxation of the sole proprietorship or a partnership with the limited liability of a corporation. The members of LLC are not liable personally for the debts or liabilities of the company.
Many business owners usually have a choice to make between S-corporation and Limited liability Company(LLC) usually popular with small business incorporation.S-Corps are the most popular business entity in the U.S.
The Similarity between S-Corps and LLCs
Both LLCs and S-Corp business entities share a “separate entity” status enjoyed by corporations. The separate entity status means the business and the owners are separate, and this is to offer liability protection from the risks associated with doing business.
Difference between S-Corps and LLCs
An S-corporation usually divides profits between the shareholders evenly; this means someone with 25% of the stock would receive 25% of the profits, and someone has 15% of the stock will receive 15% of the profits.
LLC business entity usually issues member units and not common stocks as it is in S-Corps. It is the members who decide how profits will be divided, and a member can receive more than what they have invested if all the members agree that he deserves it. For example, someone with 15% of the stock who does 50% of the work members can agree he be given more.
S-Corps usually follow a more traditional structure when exercising voting powers. Stock ownership is the determinant of voting powers.LLC may give more or fewer powers of voting to a member regardless of the stock he has.
Benefits of LLC
LLC is a more flexible business entity with lesser requirements to form compared to the S-Corp entity.LLC entity seems like a marriage between a small business and a corporation.
LLC offers you the following benefits;
- You can operate with a single member
- There is no requirement for annual meetings.
- No restrictions on ownership
- LLC usually pass-through taxation to the personal income of the members.
Benefits of S-Corp
S-Corps have fewer benefits compared to business entities operating as LLC. An S-Corp providing benefits such as health insurance, disability, and more will get better deductions than an LLC.
The pass-through income in LLC is considered a “passive income” in S-Corps and is not earned income, which is the case with LLCs, and this means Medicare taxes and Social Security taxes are not levied.
LLC usually has a limited shelf life, and some states in the U.S have a cap on how long they need to operate or stay in business, after which they are dissolved.S-Corps are the best for long shelf-life.
Choosing the right business entity depends on your business’s needs and the goals you need to achieve. Overall, LLC allows more free negotiations and possibilities for ownership and accountability. There is more tax savings and shareholder uniformity in S-corps. It is important to note that both LLC and S-Corps offers you tax protection.
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