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:
LLC
Pros
- 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
- It helps you avoid double taxation (your net revenue is only taxed once)
- Can add “members” (owners) as needed and issue different levels of membership
Cons
- 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)
S-Corp
A tax election with the IRS. (Meaning that you have to start with another entity selection, like a sole proprietorship, C-Corp, or LLC.)
Pros
- It can save the business owner a lot of money in taxes (especially self-employment taxes)
Cons
- 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.
- This 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.