From what I have read, both LLCs and S-Corps give you the benefits of a Corporation for legal purposes while avoiding double taxation.
However, I can't determine what the difference between the two business structures is. They appear to be the same thing.
What are the implications of choosing S-Corp vs. LLC when starting a company?
Both LLCs and S Corporations offer limited liability while providing pass-through taxation. The way they are taxed, however, is entirely different under the tax code. LLCs are taxed under Subchapter K (the same as partnerships) and S Corporations under Subchapter S (unique to S Corporations). Here are a few things to keep in mind:
- Only U.S. Citizen or Permanent Resident Shareholders
- Only one class of stock (basically)
- No entity shareholders, such as corporations
- No more than 100 shareholders
S Corporations require an officer, which must receive a salary. You must pay payroll taxes on this salary and therefore file an extra tax form (941). However, you generally only owe self-employment taxes on the salary, and the rest is free from self-employment (FICA) taxes so there is less tax burden as you make more money.
- No restrictions as in S Corporations (i.e. can have foreigners, entity shareholders, more than 100 members, and different types of payment).
LLCs at their earliest stage are simpler than S Corporations if you select member-managed LLCs because you will not have to pay yourself a salary and pay payroll taxes. However, all the money you make from an LLC is subject to self-employment taxes, so as you grow bigger, LLCs are actually more costly.
At their complex stage, LLCs are more complex than S Corps because they allow for special ways to split profits that are disproportionate to interests, and other profit splitting methods, all of which require consulting with an attorney or accountant as they are beyond the basic setup provided by online formation companies.
Note: This is not legal advice and does not create an attorney-client relationship.
Some of the other interesting things about S-Corps are:
Taxes are similar to an LLC. All states do have LLC's now and the rules vary from state to state. A great comparison can be found here.
Sometimes, it is a matter what you want to be when you grow up. S-Corporations are really full fledged "C" corporations which elect sub-chapter "S" status for a period of time. This special status allows the tax implications to flow through to the individual owner, avoiding double taxation. Because they are fundamentally corporations, these companies can drop their "S" status at a later date. This typically happens when the number of owners increases, often associated with taking in outside investment.
LLCs typically have a limited number of partners, which can't grow beyond a fixed number. This is why professional partnerships often wind up being Limited Liability Companies. I also believe that not all states support LLCs.
Here is a guide:
http://www.morebusiness.com/getting_started/incorporating/d934832501.brc But seriously, if you do not know which to choose, hire a professional to help you. There are many variables, ranging from tax issues to liability issues. Creating a legal entity to hide behind such as a corporation does not automatically protect you always. Lawyers suing you may "pierce the corporate veil" (that's the term lawyers use for it) and be able to get at your personal assets anyway.
Suffice it to say, you cannot skimp on the cost of a lawyer and accountant when setting up a corporation/LLC/etc... The problem if that you pay your $99 to have someone create it via mail ("Set up a Delaware corporation in just 15 minutes!"), and then three years later you get sued and the lawyer suing you finds out that you did not file X document correctly, or on time, and then you are really screwed.
Oh, to answer your question: In an S-Corp, all the money it earns get taxed at your personal tax rate when the company earns it (as opposed to when you take it out of the company). LLC is similar, but different nit-picky rules apply to them. To make it worse, the laws vary by state. So again, consult a lawyer and accountant...
+1 for going to sites that explain the differences - it is an easy thing to google. Better yet, go ask an attorney and an accountant.
I see no reason to use an LLC for what I am doing - the software companies that I am a principal in are S-Corps. I did that to be able to have investors/stockholders rather than partners and to be able to pay dividends and have them treated differently than salary.
Again, do some homework - you're not going to get good advice here for your specific situation.
A sole proprietorship or a DBA might also work for you and you can avoid a lot of unnecessary work and cost.
I consulted by business accountant to help. I do know that it's easier to go from a LLC to a S-corp versus a S-corp to LLC.
One note is that the LLC operating agreement (the corporations equivalent would be the bylaws) may be simple or complex depending on whether the LLC is solely owned and run by you.
The operating agreement gets complicated with a partner/multiple owners because you have to :
1. Deal with management terms of the LLC, including whether it is member or manager-managed.
2. Determine how to share profits and losses.
3. Flesh out procedures for adding members and what happens when members leave.
My first business was an S-corporation and my new one is an LLC.
Somethings to keep in mind and discuss with a professional:
*S-Corporations cannot have different classes of stock and therefore cannot have convertible debt.
*It's tricky and not automatic to maintain your class S election and if you lose the election then you are taxed as a C-corp.
*You must pay yourself a salary with an S-corp.
Every situation is different, but as a solo entrepreneur I really appreciate the flexibility and tax efficiency of my LLC.