For years smaller businesses used the structure of an S-corporation to benefit from "pass-through taxation" while avoiding the double taxation imposed on a C Corporation. Then in 1988 the IRS decided to get in sync with several states which had passed legislation allowing the formation of a legal entity called a "Limited Liability Corporation" or LLC.
It wasn't long until other states began to pass their own versions of this legal entity. Today all fifty states offer the LLC as a choice of legal business entity formation alongside the traditional C Corporation, Subchapter S Corporation, General Partnership, Limited Partnership and possibly others.
Are the differences between the LLC and S Corporation significant enough to justify all the hoopla? Let's take a look and you can decide for yourself.
"Forming an LLC is much less complicated than forming a Subchapter S Corporation. A Subchapter S Corporation requires forming a corporation with the state then making an election to be taxed as an S Corporation (pass-through taxation) with the IRS. Forming an LLC simply requires submitting Articles of Formation to the state and creating a written document declaring how the business will be managed and operated.
"Corporations have stringent requirements for how they are formed and operated and an S-corporation is not exempt from these.
-Corporations must hold a formal stockholder meeting each year. An LLC is not required to do this. It doesn't have stockholders.
-Corporations have a myriad of legal requirements around the issuing of stock and dividends. Again, an LLC does not issue stock to its owners nor does it pay dividends.
"An S Corporation is limited to 100 owners. There is no such limit with an LLC.
"All stockholders in an S Corporation must be U.S. citizens or residents. LLC owners do not have to meet this criterion. In fact, even other business entities are allowed ownership in LLCs.
"Profits are split among stockholders in an S Corporation based upon the number of shares held by each. Profits from an LLC may be split among the owners disproportionately to each member's percentage of ownership. What a concept!
As you can see, there are quite a few differences to consider. Your set of circumstances and the vision held for your company will determine which entity can best serve those interests and purposes. It is possible that the S Corporation structure will cost more to form as well as to operate to meet the additional state requirements of a corporate structure. However, each state varies in its requirements for formation and operation. The more obvious choice may not always prevail upon a more thorough investigation of all requirements and costs.
Before you embark upon forming your business as a Subchapter S Corporation or an LLC, be sure to seek adequate counsel from professionals who are well versed with each entity in your states of interest.
Disclaimer: This article is for informational and entertainment purposes only, and should not be construed as legal advice on any subject matter.
Melissa Gordon is the publisher of LegalBuffet.com, a complete online resource that compares the legal services offered by various online companies. Find the best company for your LLC formation needs at http://legalbuffet.com/llc-services
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