I wrote this article as a sequel to my last article “C Corporation and S Corporation comparison in easy terms.” If you are deciding which format to use for a small business, it would be prudent to also consider the difference between an S Corporation and an LLC.
The wording used in each separate business entity is slightly different in order to distinguish the format. An S-corporation is held by shareholders, while an LLC is owned by members. Limited Liability Companies tend to have less stringent management and ownership provisions, since they are not designated as a corporation. Corporations are very rigid in regards to decision making, they must use corporate minutes and have regular meetings to make decisions. If you fail to abide by these rules in a corporation the IRS may refuse to allow you to write off certain expenses and assets.
Additionally, an S corporation requires that all shareholders be individual entities, while the members in an LLC can exist as individuals or even other business formations. To explain more simply, an LLC can be partly owned by other corporations and LLCs, while an S Corporation can only be held by individuals (no organizations). If this is an issue in your particular situation, it would obviously be the most advantageous to form a Limited Liability Company online.
Another important distinction between business entities is in the distribution of profits and losses. Both are used as a pass-through entity, but with an LLC you have some flexibility in the distribution. For example, imagine you start a company with $10,000 dollars of initial capital. Your friend invests $2,000, and you cover the remaining $8,000. In the case of an S Corporation your share of the profits would always be 80%, since you have 80% ownership (shares) in the company. However, what if your friend is the primary worker and you both agree that he/she deserves a greater portion of the profit. With the LLC entity, you would be able to distribute profits 60/40 or however you see fit. An S Corporation would be much more complicated, since you would have to allow your friend to buy out your shares in the company in order to change the profit sharing structure.
Both structures are subject to self-employment tax, usually around 15% on average. The biggest disadvantage to choosing a Limited Liability Company formation is that they will be taxed 15% on both profits and salary. An S Corporation will administer taxes on distributed salaries, but not profits.
This information is for general purposes only. All that we do is submitted and performed with the understanding that we are not engaged in rendering legal, accounting or other such professional service. If legal advice or other expert assistance is required, the services of a professional should be sought.
