Difference between LLC and S Corporation
If you want to incorporate, you would have to pick the ideal business structure. This is a very important consideration. You should be aware of the similarities and differences.
That way, you can make an informed decision. Both options have advantages and disadvantages. Read on and you will know which of the options can meet your requirements.
The LLC Corporation
Have you decided to incorporate? There is a need to choose between an S Corporation and LLC (Limited Liability Corporation). These entities are similar although there are notable differences as well, especially when it comes to taxation. You can begin by gathering enough information about the LLC and S. When it comes to liability, the shareholders are protected from potential liabilities and debts; this is applicable for both options. This is great news to potential business owners because they can protect their personal assets.
In an LLC, the profits or losses will pass through the corporation and will be reported to the shareholder’s individual tax return. The income generated from the LLC is taxed and you should be the one to pay for the self-employment tax. Losses are usually deducted from the tax returns which allow members to offer income sources like the W-2. Take note of the formation date and after 75 days, you will need to pay $800 for the annual tax. After this, you will now pay for the franchise tax every year. When it comes to distribution of profits/losses, the owner is free to decide since this aspect is quite flexible.
The S Corporation
With the S Corporation, taxation of the profits/losses is similar to that of the LLC but is not covered by the self-employment task. This is one of the greatest benefits that S Corporations enjoy. You don’t have to pay for the franchise tax in your first year but the CA franchise tax board will require you to pay $800 or 1.5% tax of the CA income. Allocation of the profits and losses is not flexible in comparison to the LLC and it will be split up based on the share’s percentage of all the shareholders.
The S Corporation is required to file their annual income tax return or the Form 1120S and an annual report to the Secretary of State 90 days after its formation. It requires a $25 fee. Aside from that, there is a need to maintain formalities like that of annual meetings, minutes, and drafting the bylaws. Shareholders should not exceed 100 and should be resident aliens or citizens of the US. With the LLC, formalities are not required all the time although the annual meetings are important. The owners are called members and not shareholders, and can be legal entities or individuals. Now that you know the differences between the LLC and the S, you can already decide which business structure is ideal for your corporation.
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