Should I Form an S Corp or LLC?

Posted on August 21, 2016 ยท Posted in News

Small business owners have a variety of options in choosing what type of legal entity that would like to form. Two of the most common options are Limited Liability Companies and S Corps. These two entities have many similarities but also have several differences. If you have questions about the type you should form, a business formation attorney can examine your situation and discuss your options.

Both of these options have similar benefits for the business owner. One is that they offer some protection from liability for the owner. If there is a lawsuit, for example, the business owner will not typically be liable for payment. Another benefit is pass-through taxation, meaning that no income need be paid at the business level. This generally makes it easier come tax time instead of filing complicated business returns.

It is important to understand the downside that each entity has, as well. For an LLC that has a single owner, the business owner is required to pay a self-employment tax on income generated by the LLC and will have to make quarterly estimated payments on this income. It is also vitally important that LLC owners keep their business assets and personal assets completely separate. If these assets get intermingled, the owner may lose the protection of the LLC.

The downside of an S Corps is that there are strict requirements on who exactly can form one. Specifically:

  • Must be a U.S. citizen or resident.
  • Cannot have more than 100 shareholders (a spouse is considered a separate shareholder for the purpose of this rule).
  • Corporation can only have one class of stock.
  • Profits and losses must be distributed to the shareholders in proportion to the shareholder’s interest. For example, you can’t have disproportionate distributions of dividends or losses. If a shareholder owns 10 percent of the S corp, he or she must receive 10 percent of the profits or losses.

Choosing the right organization for your business is extremely important. At Doumar Martin, PLLC, we can explain the benefits of each type of organization as well as the drawbacks. For a consultation to discuss your matter, contact Doumar Martin, PLLC, today.