S Corp vs. LLC: Which one is right for your business?
An S corporation (S corp) and a limited liability company (LLC) are both popular business structures, but they differ primarily in their tax treatments and time/expense needed to implement.
Creating an LLC is a good way to create a separate business entity that offers flexibility in its tax treatment and some protection from legal liability. An LLC can be taxed as a sole proprietorship (commonly, a schedule C), partnership, or corporation, depending on the number of members and the choices made by the LLC members. An LLC provides more flexibility with fewer formal requirements. Members of an LLC can manage the business themselves or appoint managers, making it easier to operate with less administrative burden. This structure is the most common choice for new business owners.
In contrast, an S corp is a tax status that an LLC can elect, allowing income, deductions, and credits to pass through to shareholders’ personal tax returns from a separately filed business tax return—- thus avoiding the self-employment taxes that most sole proprietors are subject to. Further benefits can be realized through “attachment of deductions” where some deductions that would not normally be “allowed” would now be acceptable to take on the return of the owner and further tax strategies can be utilized to “cut up” the income in various ways. However, S-corp owners must run a payroll for themselves (administrative expense) and are subject to more stringent requirements (quarterly only distributions) when moving funds from the business to their personal accounts.
Management and operational structures also vary between the two. An S corp has a more rigid structure, requiring owners and their percentages of ownership to be named, the accounting to produce a balance sheet, and formal meetings with minutes recorded (when applicable). The S-Corp structure can be beneficial for medium sized businesses seeking to reduce their tax liability, but may be cumbersome for smaller enterprises. The best way to know which structure would be most beneficial for your business, is to speak to your accountant prior to year-end. They can determine if a “re-structure” would benefit the taxpayers involved and if the tax savings would outweigh the new administrative costs.
