LLCs vs. S Corporations
Perhaps the most basic matter owners must decide upon when starting up a business is what type of entity is right for their needs. Corporations, partnerships, LLCs, sole proprietorships, S corporations, and their variations—the possibilities can be daunting. A College Station Small Business Attorney can discuss with you the various options and help you decide upon which is most appropriate.
When you meet with your College Station Small Business Attorney, he will assess your situation to determine what kind of business is right for you. Among the matters he will take into account are the size of your business, what it will be used for, and how many owners are involved. Whether an S corporation or LLC is best, then, is an matter that can only be determined after careful consideration.
Among the most important issues involving business formation is how the entity will be taxed. S corporations are distinguished from their C corporation counterparts partly by the fact that they enjoy what is termed “pass-through” taxation. Thus, taxes pass through the business to the owner and reported on his personal tax return. C corporations, however, are basically doubly taxed: the company itself is taxed, and then dividends paid to owners are taxed as well. LLCs are taxed the same way S corporations are, and thus both are advantageous for many businesses.
LLCs and S Corporations Compared
S corporations are offshoots of the more traditional C corporation, whereas LLCs are a sort of hybrid entity. A College Station Small Business Attorney will tell you that LLCs are very popular for the fact that they are so flexible. There is no limit to the number of owners in an LLC. An LLC can be formed much like a partnership or sole proprietorship, or more akin to a corporation. In fact, LLCs can even choose to be taxed as a S corporation. S corporations, on the other hand, are constrained by certain rules, such as the fact that there can be no more than 75 shareholders.
Another limitation of S corporations is that profits can only be distributed in direct correlation to percentage of ownership in the company. Thus, if one individual retains 75% ownership, he must receive 75% of the profits. LLCs are not limited in this way. The profits can be distributed in any way the owners choose.
You might well ask why, then, anyone would opt for the S corporation model. The answer lies in employment taxation. A company with employees may be better suited to form as an S corporation because LLCs (who don't elect S corporation treatment) must pay the full Social Security and Medicare tax of 15.3%. Owners of an S corporation, on the other hand, only pay a portion of this amount, thus realizing what can amount to a substantial savings.
If You Have More Questions
The bottom line regarding S corporations and LLCs is that you need to consider your needs to decide what is appropriate in your given circumstances. A College Station Small Business Attorney can help you with this and other business law matters you encounter. Call Peterson Law Group today to arrange a consultation at 979-703-7014.