Small business owners who do not have a legal or accounting background get confused when they have to compare a bunch of different options for incorporating. One of the common decisions is that of an LLC vs. S Corp. There are similarities, differences and advantages between the two, but they can be complex to summarize. Here are a few of the basic similarities and differences.
In comparing an LLC vs. S Corp, it is important to remember that both protect owners from personal responsibility for debts or liabilities of the business and are considered separate legal entities. They are also both pass-through tax entities, which means that they do not pay any taxes at the business level and al of the profits or losses are passed on to the owners for tax purposes. This aspect can make the tax process a bit simpler. The preceding assumes that there is only one owner.
Some of the differences for an LLC vs. S Corp are that an S corporation is limited to 100 owners, while an LLC can have as many owners as needed. S corporations are limited to United States citizens or residents, while LLCs can be owned by foreigners. In addition, an S corporation can only be owned by people, not by other types of corporations. There are no such limitations on LLCs.
In addition, S corporations have to live up to a greater number of regulations. Many of them are recommended for LLCs but not actually forced to be put into place. In some states there are other differences, such as the fact that an LLC must have a planned date to end, while an S corporation can exist perpetually. Likewise, S corporation stock can be transferred freely while that is not the case for LLC ownership or membership.
The biggest advantage of an S corporation is that there are some ways to set them up to get bigger tax savings, which is the number one reason most people would cite for deciding to use them. Now, you have a basic idea of some of the differences between an S-Corp and a LLC. Always remember to consult with a CPA and a lawyer who can help you analyze the pros and cons for your specific business.
Remember, running a business successfully does not need to be complicated. Keep it simple!
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Manny Skevofilax is a consultant and speaker that helps his clients successfully navigate the challenges of growing their businesses profitably. Since 2003, Manny helps businesses enhance their results by using his experience in strategic planning, financial statement analysis, operations, organizational development, and team-building. His consulting firm, PORTAL CFO Consulting, Inc., has attracted clients from diverse industries in the United States and abroad.
Manny can be reached at 410-808-3441 or via email at manny@portalcfo.com.