March 16, 2013

LLC Versus S Corp Business Structure Pros And Cons

Starting a business without prior experience can be a danting task, there are so many things to consider including what kind of business structure to form. Some of the most common business structures available in the USA (United States of America) are Sole Proprietorship, Partnership, Corporation, LLC and S Corp. With liability protection in mind, we will explore primarily on both LLC and S Corp in this article, some of their differences, and some of the pros and cons of each.

Limited Liability Corp (LLC) and S Corp (almost like a corporation) both provide liability protections which is one of the main reason why many people consider them instead of Sole Proprietorship or Partnership. Also, both LLC and S Corp are pass-through taxation which means that the member (in LLC) or the sharehoulder (in S Corp) will be the one that will be taxed not the company business entity itself. That is also the main difference between an S Corp and a regular Corporation is that S Corp is a pass-through taxation while regular Corporation is not. With regular Corporation the shareholder will be taxed twice as a shareholder and also as a business entity. To avoid the double taxation of the regular Corporation, thats why many individuals are down to only considering the LLC and the S Corp, and no longer considering a regular Corporation. Please do note that there are some states in the USA that will not honor the S Corp election when you incorporate, some states will treat you as a regular corporation, not an S Corp, so you have to do your research which states dos and donts.

Choosing between an LLC and S Corp are quite complicated with all the pros and cons that you have to consider, each one of them have their advantages and disavantages. The main common dominator for both is that they are both pass-through taxation and both have liability protection, but those are the only main similarity they have to each other. There are even more things to consider like the pros and cons of each of them, here are some:
A pass-through taxation, with liability protection. It is cheaper cost to form and sign up than a S Corp and it has considerably less yearly paperwork to do, almost like Sole Proprietorship paperworks is a possible option. LLC can have subsidiary companies in the future. The main problem with LLC is that is has a company lifespan, some states where you incorporate will require you to specify when the company dissolves like for instance, when you leave the company, or a member leave, what will happen to the business? Another problem is that all income with LLC is considered personal income therfore you will have to pay more than 15% of all the income as Self-Emplyment tax alone, and that will be a lot of money in tax for Self-Employment if you will be making $100,000 per year or more with the business.
Just like an LLC, an S Corp is also a pass-through taxation with liability protection, but it is so much more complicated to start and maintain because like a corporation it will have formalilties required yearly, tons of paperworks, minutes of the meeting. It does have a huge advantage in the tax saving  because with S Corp instead of paying Self-Emplyment tax in all the income, S Corp is different because you will have to pay yourself a reasonable yearly salary, for example $85,000 per year, so if your business makes $285,000 per year then you only pay more than 15% of self-employment tax in the $85,000 and the remaining $200,000 income will be tax considerably lower as distribution or dividends, but according to my reading this is where the IRS (goverment) watch very closely business people do to make sure that they dont take advantage of this part where they pay themself too low in salary to try to avoid the self-employment tax. You need to find out the reasonable salary for they type of position that you are doing with the company, as far as the exact amount of the salary? from what I gathered, nobody knows for sure, there can be several different factors that may affect what a reasonable salary is suppose to be, factors like what is your position in the company, the type of business you are doing, etc. Maybe to start, look for similar ranking or position that you are, in the same business field as your business, and determine what type of salary bracket they have, this might give you some kind of idea how much their yearly salary is to give you an idea the possible range of what is a considered reasonable salary in your field of work.
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