Why Form a Limited Liability Company (LLC) instead of an S Corporation?

6 September, 2020 by Admin

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For many years people have owned and operated their businesses as a corporation which elects to be taxed under sub chapter S of the Internal Revenue Code. This is commonly known as an "S-Corporation or S-Corp".

While an S-Corp has the advantage of not paying any tax at the entity level it does have disadvantages because of the severe restrictions on the eligibility of shareholders and classes of stock which can be issued.

Problems with S-Corp:

  • S-corps cannot have more than 100 shareholders. If you plan to "go-public" or expand your capital needs this will be a problem;
  • S-corps cannot have corporation, partnership, trust, or non resident alien shareholders;
  • S-corps cannot have more than one class of stock. If you plan to have more than a basic capital structure this may also become a problem.
  • S-Corps are required to file an annual tax return.

Tax Advantages of Limited Liability Company:

A limited liability company is another form of business entity available. It is commonly known as an "LLC". An LLC provides its owners the same level of protection from the liabilities of the business that a corporation does. Typically an LLC will elect to be taxes as a Partnership for Federal Tax purposes.

An LLC taxed as a Partnership has several advantages over a typical S-Corp including:

  • An LLC can have as many owners as it wants, there are no limits.
  • Anybody can be an owner of an LLC, including non-US citizens, corporations, trusts and another LLC;
  • An LLC can have multiple classes of stock.

Other LLC advantages.

An LLC can be structured in almost any way the owners desire. While the operations and business structure of corporations are largely controlled by statutes the owners of an LLC can do it their own way. An LLC can be structured like a partnership wherein all owners have equal control and share the profits equally. Alternatively an LLC can have both voting and non voting members. This is especially attractive to parents who want to transfer the value of the business to their children while still controlling the business during their own lifetime.

What is a Single Member LLC?

A single member LLC is an LLC with only one owner, similar to a sole proprietorship. A single member LLC is very simple to form and operate. A single member LLC can elect to be a disregarded entity for IRS purposes and is not even required to file its own separate tax return. All of the income and expenses of the single member LLC are simply reported on the form 1040 tax return of the owner. This can save time and money.