When starting a new business venture, entrepreneurs are often confused about choosing the type of entity for their new venture. Limited liability companies, or LLCs, have become a popular alternative to the traditional forms of business. As one examines the various business structures they inevitably compare the pros and cons of choosing a LLC versus an S Corporation.
So what is the difference between an S Corporation and a LLC? Which structure is right for you? The answer depends on your own unique situation. If operational ease and flexibility are important to you, an LLC is a good choice. If you are looking to save on employment tax and your situation warrants it, an S Corporation could work for you. This is the first of a three – part series examining the match up of these two entity forms.
An S Corporation is essentially a regular corporation for all legal purposes other than for income tax purposes. For income tax purposes, an S Corporation has met certain qualifications and made a special federal (and sometimes a separate state) tax election. Once approved, the election makes the income taxation of S Corporations and LLCs similar in that they are both “pass – through” entities whereby the income of each of these entities is passed through to the owners and reported on the owner’s personal income tax return. By reporting the income at the owner’s personal level, the double level of taxation generally incurred by the standard corporation or C Corporation is eliminated. The double level of taxation occurs because the net income of the C Corporation is subject to corporate income tax, and any money distributed to the shareholders is then subject to personal income tax.