Your Business Decision S-Corp Vs Llc | The Plan Is To Blog

When setting up a new business, arm yourself with all the facts before deciding what form of entity to choose.  Because, whichever entity you choose for your business will have financial, legal and tax implications.

Business owners often narrow their choices down to an S-Corporation or an LLC.  The S-Corporation is a single that files an S-Election for tax treatment purposes.  The S-Corporation is initially less expensive to form, given that there is no publication requirement; a requirement to publish a notice of formation in two newspapers over 6 weeks. The annual franchise tax is based upon wages paid, from a minimum tax of $100 to maximum of $10,000.  The S-Corporation files a separate tax return and this may increase accounting costs towards the company.

An LLC is far more expensive to initially file given that there can be a publication requirement.  The cost to publish can add $350-$450 for the costs of formation.  In addition, similar to Franchise Tax, LLCs are required to pay annual filing fees.  Beginning in 2008 the amount from the annual filing fee for 1 member LLC was reduced from $100 to $25.  For LLCs that are treated as partnerships for tax purposes the annual filing fees are now based upon the LLC?s gross income ranging from $25 if the LLC?s gross income was less than $100,000, to $4,500.00 for LLC?s whose gross income was over $25,000.000.

One tax benefit for a single-member LLC is that the company can be a disregarded entity for tax purposes, so the process from the business is reported on the member?s income tax return.  For an individual, the income would usually be reported on Schedule C or Schedule E of Form 1040.  An LLC with far more than a single member is typically taxed as a partnership, even so, and a separate income tax return is typically required.

Some basic legal differences also exist between the formation from the S-Corporation and the LLC.

The S-Corporation provides personal liability protection for its owners.  Owners are generally known as shareholders and they?re issued stock certificates.  Shareholders elect directors, and they, in turn elect officers.  By-laws and the business corporation law govern the entity.  No foreign citizens or entities can be shareholders and no corporations or LLC?s can be shareholders.  There can be a limit to how numerous shareholders are permitted in an S-Corporation.  The business corporation law is restrictive and provides shareholders with certain rights.

The LLC also provides an owner with personal liability protection. Owners are generally known as ???members? and are ???interest? holders.  They can be issued membership certificates or designated a percentage of membership interest.   There is no limit for the number of members in an LLC.  Any entity is actually a member and you will discover no restrictions on foreign members.

An operating agreement and the limited liability law governs the entity.  The limited liability company law is not as comprehensive as the business corporation law allowing the operating agreement to have significant control over the members and their business relationships.

Unequal distributions can be developed to members and special allocations can be developed.  Furthermore, a non-equity owner may be given total voting and management control from the LLC.

It?s critical to understand the tax implications in those two corporate entities the income of both entity passes through for the individual owners, whether an LLC or S-Corp, but in an LLC where the owner is an active participant from the trade or business, all from the income is subject to self-employment tax.

In an S-Corporation, Social Security and Medicare taxes (self-employment tax) are only paid on wages received in the S-corporation.  Each entity has the ability to distribute assets for the owners as a tax-free return of capital, but in an S-Corporation, the owners must be careful of disguising compensation from the form of tax-free distributions, thereby avoiding the self-employment tax altogether.

If the owners in an LLC elect to become treated as a partnership for tax purposes and guarantee any debt from the LLC, this guaranteed debt adds to theirbasis from the partnership. In an S-Corporation, personal guarantees do not increase your basis.

In an S-Corporation, certain events may trigger the revocation from the S-election.  If this happens, the corporation would be treated as a normal C-Corporation and numerous from the tax-related benefits from the S-Corp election would be eliminated.  An LLC is treated as a partnership unless it elects to become treated otherwise, so there is no concern about revocation of elections.

An LLC is far more advantageous if the LLC owns assets such as real estate that are expected to appreciate in value.  The LLC has the ability to distribute out the asset to an owner and the owner takes the carryover basis from the property.  In an S-Corporation, the distribution is developed at fair market value and the S-Corporation immediately recognizes any gain upon distribution rather than upon the sale from the asset.

If an LLC treated as a partnership redeemed the ownership interest of a single of its owners for superior than book value, the partnership has the ability to step-up the basis of its assets.  An S-Corporation does not have this flexibility.

In order to maximize the benefits of an entity for your business, it is critical to talk with your legal counsel and accountant prior to forming any entity. Understanding the legal and tax implications from the entity you select is essential in operating your business from the future.

Source: http://soplan.co/?p=2153

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