At least once a week, our office gets a call from someone asking us whether they should form a Limited Liability Company (LLC) or an S-Corporation (S-Corp).
We always say that there is no “one size fits all” answer to this question. Both are “disregarded” entities to the IRS, meaning that any profits “flow through” to the individual stakeholders. Choosing to elect as an S-Corp can have benefits for some, but the added work that goes along with owning an S-Corp won’t be worth it to all.
Here is a quick breakdown of the pros and cons of the LLC vs. S-Corp:
- The cheapest and most flexible legal entity available
- Protects you (the owner or owners) from the debts and liabilities of the business, with the below exception
- Helps you avoid double taxation (your net revenue is only taxed once)
- Can add “members” (owners) as needed, and issue different levels of membership
- You might be personally liable for loans and debts that were taken out using your name, Social Security number, and/or personal financial information. That means you’re on the hook for these debts even if the LLC can’t pay them off
- If you intend to raise money or find investors, you may need to convert to a standard C-Corporation (C-Corp), depending on the comfort of your investors
- Your exposure to self-employment tax could be minimized more efficiently in another type of entity (you may be able to be taxed as a corporation, but it gets complicated)
A tax election with the IRS. (Meaning that you have to start with another entity selection, like a sole proprietorship, C-Corp, or LLC.)
- Can save the business owner a lot of money in taxes (especially self-employment taxes)
- Need to adhere to strict regulations and formalities, including holding regular meetings, keeping minutes of those meetings, and using a formal corporate resolution to document any changes to the organization
- You’ll only see significant financial benefits when the company has a revenue of $100,000 or more
- Can make it more difficult to seek investors and funding, due to limitations on the number and type of shareholders that an S-Corp can have
As you can see from the above, the S-Corp status—while it can be a great choice—is only right for a select group of businesses. In general, LLCs are easier to manage and still offer a significant advantage.
Seek the counsel of a business attorney or qualified CPA to see what is right for your particular company.