S-Corporation VS LLC: What to Choose for Your Business

6 Min Read
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Last updated September 2, 2022
Written by Dmytro Kondratiev
Editor, lawyer
Disclosure: We earn a commission from some partner links. Commissions do not affect our editors' opinions or evaluations.

Looking for the best conditions for registering a business in the USA? In this article, we have compiled comprehensive information regarding the LLC and S corp formation. So, we are ready to share our conclusions succinctly.

S-Corporation and LLC: What Makes Them Different?

S corporations and LLCs are different variants of your company organization. Thus, they do not exclude each other and can coexist for the benefit of your business. 

LLC is a form of a legal entity, and S (Subchapter) corporation is a tax classification, which helps the company owners save money.  

Peculiarities of LLC Formation

An LLC is primarily notable for its ability to secure you and your assets through the protection of personal liability. In the event of a mishap (such as a lawsuit against the company), the LLC owner is not personally liable, and his or her assets remain intact.  

This type of business can be registered quite easily and is not expensive. These factors attract people and encourage them to form a company of this kind. 

In addition to these facts, LLC registration has many other features:

  • Formation costs from $50 to $500, depending on the state;
  • LLCs can have an unlimited number of members;
  • It has a simple system of reporting and maintaining business positive status;
  • It can have different management structures (managers/owners);
  • It does not authorize the issuance of stocks;
  • Owners of the company do not have to be U.S. residents;
  • LLC owners can choose the taxation system;
  • The owner is legally considered self-employed. 

Features of Obtaining an S Corp Status

S corp is a type of taxation that you can also choose for your LLC if it suits your needs. Saving money is the deciding factor for many, and this type will help you avoid paying twice. Nevertheless, S corp partially limits the rights that LLC registration gives you.

Here are some notable features of S-corporation:

  • The cost of getting registered is $100 to $200, depending on the location;
  • The more complicated process of registering and maintaining a business than just forming an LLC;
  • It gives the right to issue stock and have shareholders;
  • Only U.S. residents are eligible to form;
  • Limits the number of members to 100 people;
  • The owner may appoint him/herself to a position in the company and be paid as an employee (the government will not consider the owner self-employed);
  • The owners are required to appoint a board of directors and cannot choose other systems of management. 

S Corp VS LLC: What’s Best for Your Business? 

The main reason business people hesitate to choose an S corp or LLC is the desire to save on taxes. 

Since the owners are considered self-employed by the government when forming an LLC, they are required to pay tax on all of the company’s profits. Currently, the tax rate is 15.3%. This is a significant expense that can be minimized.

If you choose S corp, you can partially avoid it. This tax classification option allows the business owner to have a position with the company and be paid as an employee. This way, some of the profits will be counted as wages and not the net income of the company. 

Additional features of this solution:

  • Each owner-employee can receive a salary from the company. That way, a significant portion of the profits can be distributed;
  • Salaries would still be subject to income tax and state tax;
  • Wages should be at the level of your industry’s payroll. 

The last point means that if professionals in your niche make an average of $80,000 a year, there’s no way you can set yourself a payout of $500,000. The government checks these aspects on your records and won’t allow you to do this kind of shenanigans. 

Meanwhile, there are still perks to not getting S corp status for your business:

  • You don’t have to involve only U.S. citizens in establishing and managing the company;
  • You can run the company yourself or hire managers;
  • You can qualify for various tax credits;
  • Soft requirements will help you save time and effort. 

Who Will Enjoy an S Corp Status? 

If you have grand plans and intend to grow your company to a large scale in terms of profits, then the option of S corp status will be relevant to you. Stock management, tax savings, and a more sophisticated reporting system will help you run a large company successfully. 

Nevertheless, it takes more effort and time to maintain such a structure. 

Who Will Enjoy a Standard LLC Formation? 

Often, small companies with stable smaller profits don’t need to get S corp status. It’s simply not worth the effort to meet the more complex requirements. If your plans don’t include rapid company growth, enjoy the lenient terms and conditions of operating as an LLC. 

This option will suit those business people for whom stability, simplicity, and protection of personal liability come first. 

S Corp VS LLC: How to Make the Final Decision?

To take the final step, ask yourself these questions:

  1. Do I plan to make a consistently moderate profit? 
  2. Am I ready for the self-employment tax to impact the company’s budget? 
  3. Do I plan to attract non-resident participants to the business? 
  4. Is simplicity and protection of personal liability the most important criteria for me? 
  5. Do I want to qualify for tax credits? 

If your answers are positive, the LLC formation will be relevant to you. If you have answered negatively to some questions, consider obtaining an S corp status for your company or corporation.  

Conclusion 

At this point, you know that obtaining S corp status for a large company helps business owners save on taxes and ensure steady profit growth. However, the leniency of the authorities’ requirements for an LLC can offset the savings and be a great option for smaller companies. 

You should make a decision based on the unique situation you and your business are in. The important thing is that the structure you choose works for your company and helps it function successfully.

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