LLC vs S Corp: Choose The Right Structure for Your Business
For small businesses, there are two main choices for incorporation: LLC vs S corporation. Let’s talk about each structure and simplify the right choice for your business.
LLC basics
LLC stands for Limited Liability Corporation and is one of the simplest entities to set up. It gives you flexibility on running and managing your business. A board of directors is not required and there can be an unlimited number of owners.
LLC owners are self-employed. Medicare and Social Security taxes are paid on their entire portion of the company profits. If you elect taxation under a corporate status, you pay these taxes on the salary and take the rest of the profits as a distribution. LLC is the easy choice for most small business as it allows you to change your tax classification to S corp if it make sense to do so down the road.
S Corporation basics
An S corporation is another way to classify a business. Designed for smaller corporations, it is a tax categorization rather than a legal entity. An S corporation doesn’t pay income tax at the corporate level like a C corporation does. Rather, the company’s income, losses, deductions, and credit are passed. There are a maximum of 100 shareholders who will receive common stock. Shareholders report the profits and losses realized on their personal tax returns.
S corp owners are company employees for tax purposes. They receive a salary and pay income, Social Security, and Medicare taxes on this salary. Company profits at the end of a reporting period are paid out to the owners/shareholders as distributions and taxed differently.
Best LLC and S Corp filing services
#1. ZenBusiness
The best all-round LLC & corporation filing service
Pros & Cons
As the name suggests, there’s no need to ruin your Zen under the weight of legal jargon – ZenBusiness is one of the most reliable Registered Agent services with thousands of positive reviews and high ratings.
ZenBusiness is our top pick for a variety of great reasons, from their automated workflow system, expert advice, and simple, no-nonsense web interface. They even package the whole LLC process into a single product, making your experience smooth, fast, and worry-free.
With Zen Business, you also get a virtual dashboard, so you have 100% visibility of the forms and documents of your company. You can go through them, download them, and even print them to have a personal copy for any business or legal reasons.
#2. IncFile
Award-winning incorporation formation service
Pros & Cons
You can register your LLC or corporation with IncFile for free (+State fees). The free package will not cover all the essentials for your business, but it includes; Preparing & Filing of the Articles of Organization, Unlimited Name Searches and FREE Registered Agent Service for a year.
#3. RocketLawyer
Simple incorporation filing solution
Pros & Cons
You can register your corporation or LLC with RocketLawyer for free if you purchase their subscription. I really like the fact that RocketLawyer can support my business with many simple online legal services and contract templates including employment contracts, trademarks and many more legal services. They help simplify a lot of the legal services which translate into significant savings. If you are able to manage the modification required to some standard contracts and agreements and can just consult with a lawyer on final drafts we highly recommend considering their service.
Requirements of an S Corporation
There are limitations of an S corporation. If you do not meet these requirements, you need to consider setting up a C corp. All owners and shareholders must be US citizens or residents, with the primary place of business being in the United States. There is a limit of 100 owners, who can be individuals, trusts, or estates. Partnerships, non-resident aliens, or other corporations cannot own an S corp. Only one class of stock is permitted.
LLC vs S Corp – The easy choice
You can always get started as an LLC and change your tax structure to S corp down the road when your business is profitable enough to justify the additional paperwork and requirements.
Why use an online filing services to incorporate?
Online incorporation filing services offer a fast and cost-effective solution to forming a business. These filing services and industry experts offer all the services you would need to start and run your business, such as preparation and filing of LLCs and corporations, business licenses, legal documents, compliance, and registered agent services, all in one place, for an affordable price.
We’ve tested more then a dozen of the best online LLC and the top corporation filing services so all you need to do to get started is select one of the top business formation services from the list below and complete your business registration online in less then 10 minutes.
LLC vs S Corp – Additional info
One of the main advantages of the S corp tax choice is a potential money savings and retirement plan contributions available if the LLC makes a gain after salaries are paid. There may be more funds available for growth. S corporations have the same asset and liability protections as an LLC.
After looking at the requirements of an S corporation and deciding that this entity is right for you, the process involved in setting up an S corp is fairly easy. If you haven’t already, you’ll need to form an LLC or corporation with the proper state agency in charge of business filings. After that, you must file the proper IRS forms selecting taxation as an S corporation.
Disadvantages of an S Corporation
S corp require more extensive filings and fees to remain in legal compliance. Certain types of business may require further tax forms or the implementation of a pay system. A board of directors is required, which gives the owners less control over decisions. Official board meetings and record keeping are also needed.
An S corp places restrictions on investors or the reinvestment of profits back into the business. A C corporation can offer more flexibility if these options are important.
Can I change an LLC to an S corporation
Yes, if your business qualifies as a S corp. If you formed your LLC as a one owner entity or partnership and you’d like to change this to an S corporation, it is relatively simple. First, you need to make sure that your business qualifies as an S corporation. An LLC is not automatically classified with a corporate status. If your current LLC is a domestic corporation, has no more than 100 shareholders, no shareholders are a partnership, non-resident alien, or corporation, and the entity has only one class of stock, you will be able to convert to an S corporation.
If you would like to formerly change your entity from an LLC to an S corporation, you will need to file with the state agency that handles corporate filings. A formal change to the entity is required and will generally cost you about the same as filing paperwork for a new entity. You will most likely need to file Articles of Conversion for the corporation and provide shareholder and stock information. At this time, you will also elect the tax status of S corporation.
Tax consideration for LLC
The difference comes with how the LLC is set up in terms of taxes. If you set up your LLC as a corporation, you may be taxed twice – once at the personal level and once at the corporate level. If you set it up as a partnership, there are two members who must agree on how the business is operated and how the profits will be shared.
LLC – additional considerations
LLCs cannot go public. Depending on your long-term plans, you may have to restructure your entity at a later date. Additionally, if you plan to eventually take your company worldwide, consider that other countries may not recognize the LLC structure.
Consulting
If you are still not sure what’s the right structure for your business, it is always a good idea to consult a lawyer and accountant when deciding which entity and tax classification is best. They can answer many questions you haven’t thought of and prepare you for future growth, retirement, taxes, profitability and more.