Business LLC or S-Corporation: Which Is More Powerful?

LLC or S-Corporation: Which Is More Powerful?


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Certified tax advisor @ S. Sharma Tax, Inc.

As a tax and business consultant, one of the most common questions I get is “Should I open an LLC or S corporation?” I wish there was a quick and easy answer to this question; however, there are many things to consider before jumping online and registering a company. First and foremost, I recommend doing thorough research or consulting with a legal and tax professional to determine which structure is best for your business. You will be surprised how many people consult with their friends and immediately decide to open a business.

When it comes to structuring a business, one of the most important decisions business owners make is deciding what kind of entity is best for their business. From my experience, LLCs and S Corporations are the most common. Both LLCs and S-corps provide liability protection for business owners, but they have different tax and organizational structures that can affect a company’s financial and legal status.

LLCs are a popular choice for small businesses because they offer personal asset protection while allowing for onward charging. This means that the company itself pays no tax on its income; instead, the gains and losses are passed on to the individual owners, who report them on their income tax returns. This eliminates the need for double taxation, which occurs when a C corporation pays taxes on its own income. Then shareholders pay taxes on the dividends they receive from the company.

S-corps, on the other hand, is a type of business that has chosen to be taxed under Subchapter S of the Internal Revenue Code. Like LLCs, S-corps also offer personal asset protection and chargeback. However, there are some key differences between the two structures. An important difference is that S-corps have stricter rules for ownership and management. S-corps can have up to 100 shareholders and must be resident entities, while LLCs can have unlimited members and be incorporated in any state. In addition, S-corps must have a board of directors and hold annual meetings, while LLCs have no such requirements.

One of the main advantages of S-corps over LLCs is that they allow more favorable tax treatment of income that is passed on to the owners. For example, owners of an S corp and LLC are required to pay taxes on the profits, whether distributed or not. Profits from an LLC are subject to self-employment tax (Social Security and Medicare). While S-corps profits are not subject to self-employment tax, this effectively results in savings of 15.3%.

In conclusion, the decision to form an LLC or an S corp depends on a company’s individual needs and goals. LLCs offer more flexibility in terms of management and ownership, but have restrictions on who can open them. For example, professionals who require a state license to practice their profession cannot be an LLC. Instead, they are required to operate a Professional Corporation, while S-corps offer more favorable tax treatment.

The information provided here is not investment, tax or financial advice. You should consult a licensed professional for advice on your specific situation. Business Council is the leading growth and networking organization for entrepreneurs and leaders. Am I eligible?

Shreya Christina
Shreya has been with for 3 years, writing copy for client websites, blog posts, EDMs and other mediums to engage readers and encourage action. By collaborating with clients, our SEO manager and the wider team, Shreya seeks to understand an audience before creating memorable, persuasive copy.

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