LLC vs S-Corp

Creating a new company is an exciting but often confusing venture. There are so many decisions to be made, and each choice will impact your business for years to come. The first thing that every new business owner must decide is which business structure works best for their needs. For small business owners, the three most popular options are Sole Proprietorship, Limited Liability Company (LLC), or S-Corp.

Many people start out as sole proprietors because it is the simplest and least expensive option. Some will operate under this structure for the lifetime of their business. The advantages are no registration costs, no legal formation requirements, and no complicated tax filings. But sole proprietorships have disadvantages too. They leave the owner open to liability and do not provide any tax benefits. These two factors are the main reasons that owners consider structuring as an LLC or S-Corp.

Some people never consider an LLC or S-Corp because they think it will be too complicated or expensive. MB Group wants to dispel these myths and help entrepreneurs make choices that will benefit them in the long-term.

Why choose an LLC? 

• Limited personal liability

An LLC separates the owners from the business. This means that owners will not be held personally liable for business debts. It offers protection for the owner’s personal assets, like their home or personal bank accounts.

• Flexible tax status options

LLC owners can choose how they want to be taxed. They can elect to be treated as a partnership/sole proprietorship or an S-Corp. Sole proprietor status allows for simpler tax preparation filed with the owner’s personal returns. S-Corp status offers some benefits of corporate tax credits without the costs of running a corporation.

• Minimal operating procedures

Every state sets its own procedures for registering and maintaining an LLC. But in any state, operating costs and procedural requirements are less than those imposed on traditional corporations. After the initial registration is complete and the Operating Agreement is filed, there are few ongoing administrative tasks needed to run an LLC. Dissolution procedures are generally quick and simple, and most states only ask for nominal annual fees and periodic information updates.

Why choose an S-Corp? 

• Eliminates personal liability

Corporations, including S-Corps, are considered independent legal entities. They can make a profit or experience a loss, are responsible for their own taxes, and can be held legally liable for debts or lawsuits. Corporate legal status offers maximum protection from personal liability.

• Has shareholders

S-Corps can raise funds by selling shares of stock to the public. Shareholders can buy and sell their stock with no disruption to business operations. S-Corps can exist in perpetuity as long as the stock holds value.

• Avoids double corporate taxation

With C-Corps, profits are taxed twice; first on corporate gains and second on the dividends paid to shareholders. An S-Corp is unique because it acts as a pass-through entity. It allows gains and some losses to be claimed on the owner’s personal tax returns, avoiding the expense of high corporate tax rates.

How Are They Similar?

• Both LLCs and S-Corporations have limited liability protection, and are not personally responsible for any business debt or liability.
• S-Corps and LLCs are both pass-through tax entities. This means that at the business level, no income taxes are paid. Profits or losses of the business are passed through to the owners' personal tax returns. It should be noted, however, that LLCs can elect to not be taxed as pass-throughs.

Differences between S-Corps and LLCs

• S-Corps and LLCs differ when it comes to the allocation of both profits and losses. LLCs can allocate profits and losses however they see fit, the percentage of ownership doesn't automatically equal the percentage of the profits and losses. However with S-Corporations, it does. Profits and losses are allocated to shareholders based on the percentage they own. 
• When it comes to the transferability of ownership, stock is freely transferable for S-corporations. However, for LLCs, this is not the case. LLC ownership is not freely transferable as approval from other members is a requirement. 

Is an LLC or an S-Corp better for my business?

LLCs are a great choice for low-risk businesses that want flexibility and minimal administrative demands. S-Corps are a great choice for medium and higher risk businesses that want the option to raise funds by selling stock and can accommodate the extra costs and stricter procedural requirements. Every situation is unique, and it is best to consult a business tax professional before deciding on a business structure. 

At MB Group we specialize in tax planning and business accounting for companies of all types. We’d love to help you grow your business. Our expert team will work with you to evaluate your needs and choose the option that is right for you.

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