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Limited Liability Company (LLC) v. S Corporation?

The Age-Old Question for every Business Attorney

You finally decide to start a business or change from being a sole proprietor and make the decision to protect your personal assets.  it is imperative you plan and by law, decide the legal formation that best fits your business. Each business is unique and you should not be bound to a “one size fits all” approach. Consider the following:

1. Protection 

  • Starting an LLC is the creation of a legal entity that protects its members from personal liability for debts incurred by the company. 
  • Alternatively, an S Corporation is a tax status. It offers similar protections to its shareholders to avoid personal liability from corporate debts when in compliance. 

2. Formation Considerations 

  • An LLC can be owned by unlimited individuals (including nonresidents), corporations, companies or certain financial institutions. 
  • An S Corporation can only be owned by individuals that are U.S. Citizens or legal Residents and is limited to 100 shareholders. 
  • An LLC is easier to establish and operate because of the flexibility of the structure and limited formalities through its operating agreement.  
  • An S Corporation is more rigid in terms of formal requirements from adopting the bylaws to the annual reporting requirements. 

3. S Corporation Benefits 

  • If any shareholder intends to receive a W2 for work performed for the business then an S Corporation may be the best choice.
  • Filing Fees are slightly higher for an LLC than an S Corporation. 
  • For raising capital, venture capitalist usually funds Corporations and not Limited Liability Companies. 

4. Tax Considerations 

  • Both LLCs and S Corps are pass through entities; however, a single member LLC has the benefit of being taxed as a sole proprietorship.  
  • Multiple member LLCs are taxed as a partnership so that the personal returns of the owners will reflect the profits or losses. 
  • S Corps are able to avoid the double taxation as with C Corps as well as self-employment tax on distributions as with LLCs. 

These are just some important considerations; however, business owners have many other important considerations that may factor into the decision-making process and other formation options. 


 

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