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Related Articles

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

What Is a C-Corporation?

What Is an LLC?

What Is an S-Corp?

Which Type of Company Incorporation is Right for You?

 

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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.

Woodlands officially postpones incorporation efforts; no vote planned in 2020

One of the biggest projects in The Woodlands Township for the past two years - ongoing incorporation planning studies - has officially been put hold to a future time period after concerns stemming ...

Published:  Thu, 26 Mar 2020 15:42:00 GMT



GlobalData: New health trend opportunity for sleep-friendly ingredients in food and drinks

The incorporation of sleep-friendly ingredients in food and drinks is expected to have future potential as it closely aligns with many consumers' want for a better night's rest through natural methods ...

Published:  Mon, 30 Mar 2020 18:59:00 GMT



Coronavirus scuttles incorporation plans for The Woodlands

The Woodlands Township Board of Directors may have to delay putting the question of whether or not to incorporate the township on the November 2020 ballot after economic fallout from the COVID-19 ...

Published:  Tue, 24 Mar 2020 17:49:00 GMT



Could regulatory review open door to advisor incorporation?

What's more, the conditions for making the necessary regulatory and legislative changes to allow for advisor incorporation have presumably never been more favourable. For one, Ontario's Progressive ...

Published:  Wed, 25 Mar 2020 01:45:00 GMT



MindMed Reports Year-end Results and Corporate Update

Please see Note 16 "Subsequent Events" of the Financial Statements for more information. Fourth Quarter and 2019 Highlights and Subsequent Events Outlook and Update MindMed continues advancing the ...

Published:  Mon, 30 Mar 2020 15:21:00 GMT



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