S-Corp. VS LLC.

[LawyerWantToBe]

Jurisdiction

North Carolina

Greetings.

We were wondering if the kind people on this forum will please give us some insight on the pros and cons of S-Corps. vs LLCs?
We have been an S-Corp. since 1996 and are considering the LLC. structure for our small electrical service company.

Thank you for all of your valuable assistance.

 

[army judge]

Greetings.

We were wondering if the kind people on this forum will please give us some insight on the pros and cons of S-Corps. vs LLCs?
We have been an S-Corp. since 1996 and are considering the LLC. structure for our small electrical service company.

Thank you for all of your valuable assistance.

LLC Vs. S-Corp: What Are They And How Are They Different?

LLCs and S corporations (S-corps) are often talked about together, but they are not an either-or choice. A limited liability company (LLC) is a legal business structure. An S-corp is a tax classification. You can elect to have your LLC taxed as an S-corp, and many companies choose this option for tax advantages, but it's important to know when and how these advantages apply.

Business entities and tax structures can be complicated. Understanding them can save you and your company time, money and potential headaches in the future.

LLC and S-corp: Basic Definitions

An LLC is a legal business structure while S corporation is a tax classification that's available to some small businesses. Both LLCs and corporations can elect S-corp taxation by filing a form with the IRS. When starting a business, it's important to evaluate your options from both a legal and a tax perspective. Here are some factors to consider when making this decision and what's involved in the process.

What Is an LLC?

An LLC, or limited liability company, is a legal business structure that protects the owner's personal assets from the company's debts. An LLC is considered a distinct entity, which means that there is a financial barrier between the company and the owner. The owners of an LLC are called members, and LLCs can be single-member or multiple-member owned.

You can think of an LLC as a hybrid between a partnership and a corporation. LLCs are a common business structure for small and medium businesses and entrepreneurs because of their simplicity and flexibility. They have more flexible management and profit-sharing options than corporations, yet they provide liability protection that's not available to sole proprietorships or general partnerships.

"The LLC is the most recent form of entity that's been available, and it started to get a lot more popular in the mid to late 1990s," explained Chris Paris, a tax partner and CPA at the professional services firm Moss Adams.

Unlike partnerships and corporations, LLCs don't have their own IRS tax category. Instead, they're usually taxed in the same way as sole proprietorships or partnerships, depending on whether the LLC has one owner or multiple owners. However, an LLC can also elect to be taxed as an S corporation (if it qualifies) or a C corporation (C-corp).

To learn more about LLCs, including how to set one up, see our guide.

What Is an S-corp?

An S corporation is not a business entity but a tax classification. Both LLCs and corporations can be taxed as an S-corp. An S-corp doesn't pay corporate income tax such as a traditional C-corp. does. Instead, company profits pass through to owners' personal tax returns.

Not all businesses qualify to be taxed as S-corps. To elect S-corp status:

• You must be a U.S. business
• You cannot have more than 100 shareholders aka owners
• Shareholders can be individuals and certain trusts and estates
• Shareholders cannot be corporations, partnerships or non-resident aliens
• You can only have one class of stock.

S-corp taxation can have advantages for the owners of both corporations and LLCs. If your business is structured as a corporation, S-corp taxation allows you to avoid having company profits taxed at both the corporate and shareholder level. If your business is an LLC, S-corp taxation allows you to be a company employee, potentially saving money on taxes.

LLC Vs. S-Corp: What Are They And How Are They Different?

LLCs and S corporations (S-corps) are often talked about together, but they are not an either-or choice. A limited liability company (LLC) is a legal business structure. An S-corp is a tax classification. You can elect to have your LLC taxed as an S-corp, and many companies choose this option for ta

www.forbes.com

LLC vs. S-corp: Which is best for your business?

Business entity type and tax structure impact your organization's finance and compliance requirements. Two popular choices are limited liability companies (LLCs) and S-corps.

Although the arrangements share characteristics, distinct differences exist between them. Notably, an LLC can opt for S-corp classification for tax purposes. Therefore, it's essential to compare LLC vs. S-corp options when forming your business or reaching a certain profitability level.

We evaluated S-corps versus LLCs by examining regulatory provisions, taxation methods and costs. Our guide identifies the benefits and drawbacks of each option. In addition, we offer recommendations for choosing between the two.

What do an LLC and S-corp have in common?

Before deciding on an LLC or S-corp, consider how the structures are alike. Use this information to weigh the pros and cons of both approaches.

S-corps and LLCs share the following characteristics:

• Liability protections: Both structures limit personal liability, meaning creditors or plaintiffs can only access business assets. They typically can't come after your residence or personal vehicle.
• IRS eligibility limits: Not all businesses can qualify as S-corps or LLCs. Federal tax regulations restrict insurance companies and some financial firms from operating as LLCs or S-corps.
• Pass-through taxation: Both entities can show business profits and losses on personal tax returns, with individual members or shareholders claiming the tax burden.
• State obligations: Individual state statutes outline reporting, fee and registered agent requirements for LLCs and S-corps. States also define foreign entity rules for companies doing business within state boundaries.
• Business credit: Unlike a sole proprietorship, LLCs and S-corps separate personal and business liabilities. This division can make it easier to establish business credit.

What are the key differences between an LLC and S-corp?

When comparing LLC vs. S-corp entities, far more contrasts exist than similarities. For starters, companies form LLCs through the U.S. state (or states) where they do business, whereas an S-corp is a tax election governed by the Internal Revenue Code (IRC).

Other differences between S-corps and LLCs include:

• Ownership restrictions: Most states let LLCs have unlimited members, whereas the IRS permits no more than 100 S-corp shareholders. Different domestic and foreign entities can be LLC members, but S-corp shareholders can't be non-U.S. residents or corporations.
• Management options: Owners can run an LLC like a partnership and control daily operations or choose a manager-member to operate like a corporation. Multi-person S-corps have a board of directors to oversee business affairs and elect officers to run day-to-day operations.
• Yearly requirements: Typically, states require less information on an LLC annual report than on an S-corp statement. In addition, corporations should hold board meetings and record minutes. While experts recommend that LLCs hold yearly meetings, it's not a requirement.
• Profit and loss allocation: S-corps distribute profits and losses according to the percentage of ownership interest. Although this is also the default method for LLCs, members can choose different allocations by documenting them in the operating agreement.
• Salaries: LLC business owners don't earn a salary. Instead, they take an owner's draw. S-corporations pay wages to any shareholders (including owners) who provide services.
• Federal taxes: The IRS treats LLCs as pass-through entities by default, but the entity can choose to file as an S-corp or C-corp. An S-corp is also a disregarded entity but it can't file as a C-corp unless it's an incorporated structure.

Which is best for your business?

The legal and tax implications can vary significantly between LLCs and S-corps. Discuss options with your financial and tax advisors when comparing LLC vs. S-corp advantages and drawbacks.

When should you choose an LLC?

The best LLC services make it easy for startups and small businesses to set up a limited liability company. However, there are other reasons for forming an LLC.

Circumstances when an LLC may be the better option include:

• When your company profits are the same as or close to a reasonable salary for others in your profession.
• If one or more current or potential business owners are not U.S. citizens.
• When your company wants to veer away from the default profit and loss distribution methods.
• Solo business owners and freelancers who prefer simple federal and state tax, payroll and reporting requirements.
• Organizations considering bringing on a foreign investor, corporation or LLC as a stakeholder.

When should you choose an S-corp?

After forming an LLC or incorporating your business, you can elect to be taxed as an S-corp. Business owners and shareholders or members can benefit from this tax status.

An S-corp may be the better choice under the following conditions:

• When you determine it's possible to reduce your self-employment tax burden by taking a reasonable salary and dividends.
• If owner-employees could benefit from company contributions to retirement or health insurance plans.
• A business considering soliciting external institutional investors may get better results as an S-corp.
• Your company is registered as a C-corporation but meets the requirements to file as an S-corp.

Frequently asked questions (FAQs)

Can an LLC be an S-corp?
A domestic LLC that meets the IRS eligibility requirements can be an S-corp. Qualified LLCs include those with 100 or fewer members and one class of membership shares. In addition, the LLC owners must be U.S. citizens. The IRS also permits some trusts and estates to be S-corp shareholders.

Can you change from an LLC to an S-corp?
An S-corp is a tax election, and eligible LLCs can select this option. Converting an LLC to an S-corp involves filing IRS Form 8832, Entity Classification Election, within a specific timeframe.

s an LLC better than an S-corp?
An LLC may be the better option for small businesses, freelancers or companies with non-U.S. citizen owners. Likewise, organizations with over 100 stakeholders or those with corporate investors won't qualify under IRS rules for an S-corp.

LLC vs. S-corp: Which is best for your business?

With an LLC, you must pay self-employment taxes.

www.usatoday.com

 

[adjusterjack]

We have been an S-Corp. since 1996 and are considering the LLC. structure for our small electrical service company.

Why?

Your reasons for considering an LLC are important in deciding whether to form one or not.

Are you a one person business? Do you have partners (other owners), besides spouse? Do you have employees? Or do you just hire subs as needed?

 

[zddoodah]

Generalized "pros and cons," not tethered to any relevant facts, can be easily googled.

Pros and cons of llc and s corp

"adjusterjack" asked some good questions. You've been operating a particular way for nearly three decades. Is there something about the corporate form that you don't like? Did someone say that you should think about converting to an LLC? If so, why did that person say that? Did you read something that suggested LLC > corporation? If so, what did you read?

Also note that "S corp" (as opposed to "C corp") is merely an election made for tax purposes.

 

[Tax Counsel]

Greetings.

We were wondering if the kind people on this forum will please give us some insight on the pros and cons of S-Corps. vs LLCs?
We have been an S-Corp. since 1996 and are considering the LLC. structure for our small electrical service company.

Thank you for all of your valuable assistance.

Prior to January 1, 1997, the tax classification of a business for federal tax purposes was determined primarily by (1) how closely the business entity matched the powers, benefits, and limitations of corporations and (2) how many owners the business had. The S-corporation election was an exception to that general classification scheme, allowing an entity set up as a corporation under state corporate law to elect to be taxed more like a partnership. That allowed the business to get the limited liability protection of a corporation but be taxed as though it were a partnership. Because you formed the business in 1996, just prior to the release of the "check the box" regulations that made it much easier to simply elect the type of tax treatment the entity wanted, I'm going to guess that your business is set up with the NC Secretary of State's office as a corporation. That gave you the limited liability of corporations, but to get the pass through treatment like a partnership you had to elect S corporation status.

LLCs existed in most states prior to 1997 but the federal tax classification of them depended on critical details of state law and how the charter and by-laws were drafted. Business and tax lawyers had to go through all kinds of contortions to avoid their client's new business from being classified as a corporation, including getting a ruling from the IRS that it will treat it as a partnership and not a corporation. That cost a lot of money to do, so the next best thing back then to do was simply form a corporation and make the S corporation election. There was also the problem that a one onwer business cannot be classified as a partnership; for them the only choice back then was forming a corporation and electing S corporation status with the IRS. Not quite as good as being a true partnership, but the entity got the limited liability protection of a corporation and cost a lot less to set up, so that was good trade-off at the time.

I'm mentioning that background because it impacts the answer to your question. If your business is registered with the Secretary of State, which your facts strongly suggest, then there are more tax considerations involved when changing it to a LLC. An entity that is set up with state as a corporation cannot make an election with the IRS to be treated as a partnership or sole proprietorship. This means that if to be classified a partnership or sole proprietorship, you'd have to close down and liquidate the corporation with the state and form a brand new partnership, LLC or LLP. Nearly every state now allow formation of limited liability partnerships (LLPs), which would get you limited liability protection but would be taxed as a partnership without having to make an election with the IRS. The LLC and LLP are not the same under state law, so you'd have at how the state treats each to decide which is better for you.

It's not the formation of the LLC or LLP that would present any big tax issues. It's the liquidation of the corporation. The liquidation itself will cost some money as you'd have to notify creditors and others of the liquidation and pay for getting the dissolution papers filed, etc. There tax consequences to that that could cost you some significant tax if you're not careful. There are also issues of how best to transfer the current corporation's assets to the new entity. There are several ways to do it, each with different tax consequences. Which would work best for you depends on the details of your corporation's books and records and its tax attributes, like what the assets are worth and what tax basis the corporation has in them.

Perhaps the best benefit of the LLC is that it is a very flexible entity to use and also offers the most choice in federal tax treatment, too. But the LLC liability protection may not match what the corporation provides.

The first step here is to go see a NC corporate/business law attorney and have him/her explain to you what the differences are and how it would affect your business in particular. The details of the business matter a lot as to what form of business entity you want to have now. If it looks like there is significant advantage under state law for the switch find out how much it will cost you, both in direct expenses and tax costs. That will allow you to decide if the benefit you get is worth the costs of the change.

 

[LawyerWantToBe]

""Thank you."" to all for the outstnding advice, questions and history of this topic. I will heed your advice and reach out to a good corporate attorney and tax expert.