Is a S-Corp or LLC better for my business? As a business owner, you know that by forming a corporation or LLC to operate your business, you can protect yourself from many business-related liabilities. (Although not every liability—more on that later.) What is less clear is which type of entity to choose. A corporation? An S-corp.? An LLC? (And what’s the difference, anyway?)
The alphabet-soup menu may seem limitless (FLP, LLP, PLLP, etc.). For reasons beyond the scope of this discussion, the more exotic choices generally do not fit the needs of a closely-held business or startup. In most situations, the choice comes down this: corporation vs. limited liability company. In some situations, either alternative will work well. But in others, your selection can have profound consequences.
First, a word about S-corps. Despite the moniker, an S-corp. is not a weird subspecies of a corporation. Instead, it is a regular corporation that has filed an “S-election” with the IRS. This exempts the corporation from paying taxes on its corporate income. (The 35% corporate tax rate that we hear so much about is paid by corporations that do not file an S-election, called “C-corps.”) Instead, each shareholder reports his or her share of the corporation’s income on his or her personal return. For example, if I own 50% of the shares of an S-corp. that has net income of $10,000.00, I get to add $5,000.00 to the income I report on my 1040.
If this “pass through” approach to tax appeals to you, as it does to many small business and startup owners, you are in luck—it is available for limited liability companies too. While some of the details are different—more on this later—each owner of an LLC (called a “member”) will generally report his or her share of LLC income on his or her personal return. This allows the LLC, like an S-corp., to avoid paying tax at the high corporate rates. Because of this, the tax treatment of an LLC vs. an S-corp. will not be a crucial issue for many business owners.
This is just a basic overview and is not legal advice specific to your situation. If you would like to speak with Jonathan about your situation, please email him at firstname.lastname@example.org or call him at 925-217-3255.