LLC VS S Corp

LLCs(Limited Liability Corporations) and S-Corporations are popular business entities and at the small business level they are the favorites.  They are both known as flow-through entities meaning that the net profit  of the business flows through to the personal tax returns of the owners by the form named K1.  However, there are many differences between the two entities and it is a question that has come up a few times recently for clients or prospective clients of Ruchi Gupta CPA LLC. 

Below are the highlights of the differences.

An LLC is sometimes referred to as “corporation lite.”  It has all of the protection of a corporation but is easier to set up and operate.  Tastes great, less filling.

An S- Corporation follows the same record keeping rules and procedures of a C Corporation. Technically, there needs to be a board of directors with an annual meeting and minutes of the meeting must be taken and recorded. That is what the law states.  In practical terms very few small S-Corporations do all of this.  However if there are multiple owners that are not related it makes sense to follow these rules.

The S- Corporation is the smaller version of a C-Corporation used by small companies.  It is also sometimes referred to as a personal corporation.  The C Corporation is the standard corporation.  It is the entity that is used by major companies such as those on the stock exchanges. However S Corporation provide more tax advantage to small business owner by avoiding double taxation .

Following are some other issues to compare these two entities on:

Payroll-An S Corporation requires a payroll for owners and officers of the corporation.  This comes with payroll tax filings, year end w-2s, the works.  An LLC compensates owners through “guaranteed payments.”  Somewhat like paying a contractor the LLC will pay an owner for services rendered with no taxes withheld.  It then becomes the responsibility of the owner to pay his income tax.

Ownership-An s-corporation can have up to 100 owners, however none can be non-resident aliens.  No such restrictions for an LLC.

Flexibility in profit sharing-An S-Corporation needs to share profits(distributions)based on ownership percentages.  An LLC can decide to share profits as it see fit.  For instance if a 10% owner of an LLC is doing 90% of the work they are eligible to take 90% of the profits.

Employment Tax-This is the one big advantage an S Corporation has.  The profits in an S-Corporation will show up on a form K-1(think of this as a w-2 for a business) and will only be subject to income tax.  The profits of an LLC also show up on a form K-1 also and are subject to both income tax and self-employment tax, roughly 15.3%.

 

Advantage and Disadvantage of Sole Proprietorship

In the previous blog we discussed about the different type of business structures one can choose from . Today I am going to write about the advantage and disadvantage of having Sole Proprietorship :

Sole Proprietorship is the easiest form of business structure over more than 70 % of business are owned and operated by sole owner .

Following are the advantages of operating as Sole Proprietor :

1. Ease of formation.
2.You control all your own decisions and the money you make.

3.Sole proprietors have the benefit of reporting tax on any income earned through their own personal tax return, rather than filing separately as a business – which can save time and hassle.

4.Flexibility in operating a business - Sole  proprietors can choose there own hours of operation , work part time , full time without worrying answering to anyone about your own business affairs (aside from your clients, of course).

 

What About the Disadvantages?

 

One of the reason many business owner seek to incorporate instead of operating as Sole Proprietor is Because of liability issue :

 

As a Sole Proprietor there is no legal distinction between the owner and the business, which puts your personal assets at risk in case of losses and debts . Business incorporation can limit the liability to the business assets protecting the personal assets of the owner.

 

If you plan to grow your business then incorporating is a good idea as financials institution  don't prefer to give loans to Sole Proprietorship , so raising the capital required will be difficult .

 

Whether you want to incorporate or run your business as Sole proprietorship will depend on what your goals where do you want to see your business in next five year .

 

Disclaimer : Blog is for informational purpose only . Please contact you Legal and Professional Advisor before taking any decision and action.  

Choosing the Buisness Structure

Many new business entrepreneur are faced with challenge of choosing the right business structure. The business structure you choose will have legal and tax implications so its very important to decide what type of business structure will be best for you depending on the business plan you have in mind.

Below I have listed different type of  business structure , find the one best suited for your business.

Sole Proprietorship:

 

A sole proprietorship is the simplest and most common structure chosen to start a business. It is an unincorporated business owned and run by one individual with no distinction between the business and you, the owner. You are entitled to all profits and are responsible for all your business’s debts, losses and liabilities.

Limited Liability Company

A limited liability company is a hybrid type of legal structure that provides the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership.

The "owners" of an LLC are referred to as "members." Depending on the state, the members can consist of a single individual (one owner), two or more individuals, corporations or other LLCs.

Unlike shareholders in a corporation, LLCs are not taxed as a separate business entity. Instead, all profits and losses are "passed through" the business to each member of the LLC. LLC members report profits and losses on their personal federal tax returns, just like the owners of a partnership would.

Limited liability can choose to be taxed as S Corporation by making an S Election .

Corporation

Corporation (C Corporation)

A corporation (sometimes referred to as a C corporation) is an independent legal entity owned by shareholders. This means that the corporation itself, not the shareholders that own it, is held legally liable for the actions and debts the business incurs.

Corporations are more complex than other business structures because they tend to have costly administrative fees and complex tax and legal requirements. Because of these issues, corporations are generally suggested for established, larger companies with multiple employees.

 

Partnership

A partnership is a single business where two or more people share ownership.

Each partner contributes to all aspects of the business, including money, property, labor or skill. In return, each partner shares in the profits and losses of the business.

Because partnerships entail more than one person in the decision-making process, it’s important to discuss a wide variety of issues up front and develop a legal partnership agreement. This agreement should document how future business decisions will be made, including how the partners will divide profits, resolve disputes, change ownership (bring in new partners or buy out current partners) and how to dissolve the partnership. Although partnership agreements are not legally required, they are strongly recommended and it is considered extremely risky to operate without one.

( There are different types of partnership which one can choose from )

S Corporation

An S corporation  is a special type of corporation created through an IRS tax election. An eligible domestic corporation can avoid double taxation (once to the corporation and again to the shareholders) by electing to be treated as an S corporation

What makes the S corp different from a traditional corporation (C corp) is that profits and losses can pass through to the your personal tax return. Consequently, the business is not taxed itself. Only the shareholders are taxed. There is an important caveat, however: any shareholder who works for the company must pay him or herself "reasonable compensation." Basically, the shareholder must be paid fair market value, or the IRS might reclassify any additional corporate earnings as "wages."

Disclaimer : Blog is for information  purpose only . Please contact and your legal and professional advisor before taking any decision and action.