Your Business Decision: S-Corp Vs Llc?

When setting up a new business, arm yourselfmembers.
with all the facts before deciding what form ofAn operating agreement and the limited liability law
entity to choose.  Because, whichever entity yougoverns the entity.  The limited liability company
choose for your business will have financial, legallaw is not as comprehensive as the business
and tax implications.corporation law allowing the operating agreement
Business owners often narrow their choices downto have significant control over the members and
to an S-Corporation or an LLC.  Thetheir business relationships.
S-Corporation is one that files an S-Election forUnequal distributions can be made to members
tax treatment purposes.  The S-Corporation isand special allocations can be made.  In addition, a
initially less expensive to form, because there isnon-equity owner may be given total voting and
no publication requirement; a requirement tomanagement control of the LLC.
publish a notice of formation in two newspapersIt is important to understand the tax implications
over 6 weeks. The annual franchise tax is basedin these two corporate entities the income of
upon wages paid, from a minimum tax of $100 toeach entity passes through to the individual
maximum of $10,000.  The S-Corporation files aowners, whether an LLC or S-Corp, but in an LLC
separate tax return and this may increasewhere the owner is an active participant in the
accounting costs for the company.trade or business, all of the income is subject to
An LLC is more expensive to initially file becauseself-employment tax.
there is a publication requirement.  The cost toIn an S-Corporation, Social Security and Medicare
publish can add $350-$450 to the costs oftaxes (self-employment tax) are only paid on
formation.  Additionally, similar to Franchise Tax,wages received from the S-corporation.  Each
LLCs are required to pay annual filing fees. entity has the ability to distribute assets to the
Beginning in 2008 the amount of the annual filingowners as a tax-free return of capital, but in an
fee for a single member LLC was reduced fromS-Corporation, the owners must be careful of
$100 to $25.  For LLCs that are treated asdisguising compensation in the form of tax-free
partnerships for tax purposes the annual filingdistributions, thereby avoiding the
fees are now based upon the LLC's gross incomeself-employment tax altogether.
ranging from $25 if the LLC's gross income wasIf the owners in an LLC elect to be treated as a
less than $100,000, to $4,500.00 for LLC's whosepartnership for tax purposes and guarantee any
gross income was over $25,000.000.debt of the LLC, this guaranteed debt adds to
One tax advantage for a single-member LLC istheirbasis in the partnership. In an S-Corporation,
that the company is a disregarded entity for taxpersonal guarantees do not increase your basis.
purposes, so the activity of the business isIn an S-Corporation, certain events may trigger
reported on the member's income tax return. the revocation of the S-election.  If this happens,
For an individual, the income would typically bethe corporation would be treated as a normal
reported on Schedule C or Schedule E of FormC-Corporation and many of the tax-related
1040.  An LLC with more than one member isbenefits of the S-Corp election would be
usually taxed as a partnership, however, and aeliminated.  An LLC is treated as a partnership
separate income tax return is usually required.unless it elects to be treated otherwise, so there
Some basic legal differences also exist betweenis no concern about revocation of elections.
the formation of the S-Corporation and the LLC.An LLC is more advantageous if the LLC owns
The S-Corporation provides personal liabilityassets such as real estate that are expected to
protection for its owners.  Owners are calledappreciate in value.  The LLC has the ability to
shareholders and they are issued stockdistribute out the asset to an owner and the
certificates.  Shareholders elect directors, andowner takes the carryover basis in the property.
they, in turn elect officers.  By-laws and the In an S-Corporation, the distribution is made at
business corporation law govern the entity.  Nofair market value and the S-Corporation
foreign citizens or entities can be shareholders andimmediately recognizes any gain upon distribution
no corporations or LLC's can be shareholders. rather than upon the sale of the asset.
There is a limit to how many shareholders areIf an LLC treated as a partnership redeemed the
permitted in an S-Corporation.  The businessownership interest of one of its owners for
corporation law is restrictive and providesgreater than book value, the partnership has the
shareholders with certain rights.ability to step-up the basis of its assets.  An
The LLC also provides an owner with personalS-Corporation does not have this flexibility.
liability protection. Owners are calledIn order to maximize the benefits of an entity for
‘members' and are ‘interest' holders. your business, it is important to talk with your
They can be issued membership certificates orlegal counsel and accountant prior to forming any
designated a percentage of membershipentity. Understanding the legal and tax implications
interest.   There is no limit to the number ofof the entity you select is critical in operating your
members in an LLC.  Any entity can be abusiness in the future.
member and there are no restrictions on foreign