DISCLAIMER: THE INFORMATION CONTAINED HEREIN IS SOLEY FOR EDUCATIONAL PURPOSES. IT IS NOT LEGAL ADVICE OR LEGAL AUTHORITY AND IS ONLY THE AUTHOR’S INTERPRETATION OF BUSINESS LAW.
Deciding whether your business should be structured as a Limited Liability Company (LLC) or an S Corporation (S Corp) depends on various factors, including your business goals, tax considerations, liability concerns, and operational preferences. Here’s a comparison of both business structures to help you make an informed decision:
Limited Liability Company (LLC):
- Limited Liability: LLCs provide limited liability protection to their owners (referred to as members), meaning that members are generally not personally liable for the debts and obligations of the company.
- Tax Flexibility: LLCs offer flexibility in tax treatment. By default, a single member (owner) is considered a disregarded entity and is taxed as though the LCC is a sole proprietor. By default, LLCs with two or more members (owners) are taxed as a partnership, meaning that business profits and losses flow through to the owners’ personal tax returns. However, LLCs can also elect to be taxed as a corporation (either as a C Corporation or an S Corporation) if it’s more beneficial for tax purposes.
- Simplified Management Structure: LLCs have a more flexible management structure compared to corporations. For instance, LLCs are not required to have a board of directors.
- Ease of Formation and Administration: Forming an LLC typically involves less paperwork and administrative requirements compared to corporations. There’s no requirement for annual meetings or extensive corporate formalities, and different reporting obligations to the State.
S Corporation (S Corp):
- Pass-Through Taxation: Like LLCs, S Corporations are pass-through entities for tax purposes. Business profits and losses are passed through to the shareholders’ personal tax returns, avoiding double taxation at the corporate and individual levels.
- Limited Liability: Shareholders of S Corporations enjoy limited liability protection similar to LLC members. Personal assets are generally shielded from business liabilities.
- Employment Tax Savings: S Corporation owners who are actively involved in the business can potentially save on self-employment taxes. Unlike LLCs that have not elected to be taxed as a S Corporation, S Corporation owners can receive a portion of their income as distributions, which are not subject to self-employment taxes.
- Strict Eligibility Requirements: S Corporations are subject to stricter eligibility requirements compared to LLCs. For example, S Corporations must be domestic entities, have no more than 100 shareholders, and have only one class of stock, albeit you can have voting and non-voting shareholders provided they all have the same rights to distributions and liquidation proceeds.
Ultimately the best choice between an LLC and an S Corporation depends on your specific circumstances, including your business objectives, tax situation, desired management structure, and long-term plans. It is advisable to consult with a qualified attorney as well as tax advisor who can provide personalized guidance based on your needs and goals.
About the Author
Patrick J. Sullivan
Adams & Sullivan, PC, LLO
Mr. Sullivan has been practicing law for 30 years in the greater Omaha area and has helped more than 300 LLCs and 500 Corporations. He graduated from the Nebraska School of Law in Lincoln, Nebraska and was admitted to practice law in Nebraska in 1994 and in Iowa in 2012. Mr. Sullivan’s practice focuses on business law, including formation of corporation/limited liability companies and buying/selling of ongoing businesses and general business issues. His practice also includes real estate transactions, both residential and commercial ranging from buying/selling, new development, condemnations, and representation of sanitary and improvement districts.
