When structuring a business, do you choose an S Corporation or an LLC?

Ever been at a restaurant with a menu as large as Santa’s naughty or nice list? How do you choose? Do you look at the pictures, pick from a select section, or just go for the usual? Having too many choices can be overwhelming and when it involves something as vital as the structure of your business, it can’t be taken lightly, but instead chosen carefully - weighing all your options.

This is a common question among many new entrepreneurs. Let’s break down each option, from LLCs to S Corporations, and I’ll share the benefits and pitfalls of each form of entity to help you narrow it down to the choices that best fit you and your business.

The LLC as a Partnership

This entity provides the most flexibility with taxation as a partnership and is the default classification for federal tax purposes.

  • Contribution of assets - generally no gain or loss
  • Distributions – generally no gain or loss
  • Allocation of income and losses is accomplished through the operating agreement or written/unwritten agreement of members.
  • LLC member can be either a general partner or a limited partner.
  • Member ≠ employee of LLC

The LLC as a C Corporation

Not many LLCs choose to be a C Corporation.

  • Double taxation issues
  • C Corporation is chosen if:
    • the payment of fringe benefits is desired
    • Lower corporate tax rates can be applied

The LLC as a Disregarded Entity

The default classification of a single member LLC is that of a disregarded entity.

  • The sole owner is an individual
  • All items of income and expense will be reported on the appropriate Schedules of that individual’s income tax return.
  • Single-member LLCs can be used to protect the owner from potential liability and risks associated with the business.
  • Eliminates many disadvantages associated with using a corporation

The LLC As An S Corporation

There are a number of requirement for an LLC to elect as an S Corporation. For example:

  • If the LLC is a domestic corporation with 100 or fewer eligible shareholders that has a single class of stock, it can make an S election.

An S Corporation is chosen if:

  • S corporation officers/shareholders that provide more than minor services to the corporation and receive compensation are subject to self-employment tax.
  • Payments are treated as wages.
  • Non-wage compensation in the form of dividends or distributions could still be treated as wages if “reasonable compensation” is not paid in the form of wages.
  • The shareholder/employee must be reasonably compensated in the form of self-employment taxable wages for services performed for the corporation.
  • Allows some ways to extract money out of the business without paying employment taxes.

When choosing an entity there are numerous options, all of which have their advantages and disadvantages depending on the business and the owners. For questions about how to structure your business and what entity to choose, contact the Goosmann Law Firm at info@goosmannlaw.com or call 712-226-4000.

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