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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 Main 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.

Yearlong incorporation study kicks off in The Woodlands

The Woodlands Township leaders may decide by early next year whether to recommend that voters consider turning the community into a city, according to township board Chairman Gordy Bunch. Bunch wrote in an email that the two consulting groups are helping ...

Published:  Mon, 14 May 2018 05:51:00 GMT



Camp uses West Virginia's coal as creative tool

The creations fall under the umbrella of McArts Fine Arts Incorporation founded by Jean Battlo and three other artists in 1979. "I wanted to do something for McDowell, so I started McArts," she said. And now she serves as Artistic Director while working to ...

Published:  Sun, 20 May 2018 06:00:00 GMT



Baton Rouge Area Chamber voices opposition to St. George incorporation

The Baton Rouge Area Chamber board has voted to formally oppose the incorporation of the proposed city of St. George. BRAC and East Baton Rouge Parish Mayor-President Sharon Weston Broome had previously gone over St. George's budgets but expressed doubts ...

Published:  Tue, 15 May 2018 08:37:00 GMT



A Claim of priority Cannot Be Made With an Incorporation by Reference

For any patent family that has two or more patents applications, the claim of priority needs to be made correctly. Otherwise, intervening references may become prior art when they could be avoided. The "115 Patent was the last patent in a family ...

Published:  Fri, 11 May 2018 02:26:00 GMT



New charity receiving Poland Spring aid lacks federal nonprofit status

The activities council successfully filed articles of incorporation as a nonprofit organization with the Maine secretary of state's office on Jan. 18, according to an office spokeswoman, but it has not applied for nonprofit status with the Internal ...

Published:  Sun, 20 May 2018 10:58:00 GMT



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