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What are the Differences between an LLC and an S-Corp?

Friday, May 14th

What Are the Differences Between an LLC and an S-Corp?

Perhaps you've already decided to shift out of sole proprietorship or general partnership status. Friends, acquaintances or (bitter?) experience itself might have alerted you to the personal financial risks of sole proprietor or partnership status in business. Advice might come from all directions: From well-meaning friends, acquaintances, other business owners, even relatives...with no business background! The limited liability corporation, or LLC, and the S-corp status may have been suggested to you by one or more interested parties. Thoroughly evaluating the pluses and minuses of the two types of structure is critical to making an intelligent decision.

So what are the main differences between an LLC and an S-Corp?

First of all, both structures are designed to limit personal liability relative to taxes and business debt.

An LLC, or limited liability corporation, is much more like a general partnership or sole proprietorship than a corporation. The owners declare the profits from the business on their own tax returns. No corporate return is required.

An S-Corp is a corporate structure that the Internal Revenue Service assigns a special status. "Subchapter S" status allows a corporation to avoid filing a corporate tax return, reporting instead any profits or losses on the personal return(s) of the owner(s). Otherwise, establishing an S-corporation means jumping through all the administrative hoops that federal, state and local governments require of C-corporations.

An S-Corp must be registered with state, and possibly, local authorities. Filing articles of incorporation and establishing by-laws are necessary steps. Shareholders have to elect a board of directors. Regular meetings must be calendared for both directors and shareholders, and minutes from these meetings must be recorded. In addition, like a C-corporation, an S-corporation must comply with any state or local business licensing requirements. Compliance with all these regulations usually means retaining legal counsel, something an LLC may not need to do to set up shop.

Neither the LLC nor the S-corp structure requires filing a business tax return. Both LLC owner-members and S-corp owners declare business income on their personal returns at tax-filing time.

As a distinction, S-corp owners are also shareholders, and shareholders who work for the company are required to pay themselves a salary that is in line with industry salaries for similar work. The owner pays income tax on that salary, but may or may not owe any taxes on the company's profits. On the other hand, LLC owners pay self-employment tax on 100 percent of the company's net income. Needless to say, this can create a burden.

Also on the downside for the latter structure, LLC means not only limited liability but limited life: If one of the owners dies -- or even goes bankrupt -- the LLC is automatically dissolved. This can be disruptive to business, especially for longstanding clients and employees. An S-corp, as a corporation, quite literally has a life of its own... legally speaking. The vicissitudes of mortality create no obstacle to the operation of an S-corp.

Taking a good, long look at the pros and cons of the S-corp and the LLC is crucial. Seeking legal advice on which structure best suits your circumstances is good practice.

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Company Incorporation Service FAQ

Incorporation is the process used to legally create a company or corporate entity. This is usually done when a business wants greater protection and status than when under operation as a sole proprietorship.
When you incorporate, it separates your company's income and assets from your personal holdings - and from those of your investors and owners. In the event of a lawsuit against your business, your personal savings, property, vehicles, and other assets wouldn't be threatened.
Operating as either a corporation or an LLC offers significant legal protection and benefits. You'll want to incorporate, however, if you plan to do business internationally or go public.
Depending on how much help you need and which provider you select, incorporation service fees range from $49 to $899. That's in addition to any mandatory filing fees in your state.
Your paperwork can be completed and filed in one business day. Each state differs with respect to turnaround times once your application has been filed with the appropriate office.
Yes! Most company incorporation services make it hassle-free to submit all of the required documentation online, and they often file your application on your behalf. Some providers give you the documentation to fill out, but you'll have to file the paperwork on your own.
There are plenty of reputable services on the market, with thousands of satisfied customers who have used them successfully to incorporate their businesses. If you need extra reassurance that the provider you're considering is a reliable choice, be sure to check out their listing with the Better Business Bureau.
Most company incorporation services offer some form of satisfaction policy or error-free guarantee. However, if your paperwork has already been filed, any fees paid to the state probably won't be refunded.

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