| I wrote this article as a sequel to my last article "C | | | | to form a Limited Liability Company online. |
| Corporation and S Corporation comparison in easy | | | | Another important distinction between business entities |
| terms." If you are deciding which format to use for a | | | | is in the distribution of profits and losses. Both are used |
| small business, it would be prudent to also consider the | | | | as a pass-through entity, but with an LLC you have |
| difference between an S Corporation and an LLC. | | | | some flexibility in the distribution. For example, imagine |
| The wording used in each separate business entity is | | | | you start a company with $10,000 dollars of initial |
| slightly different in order to distinguish the format. An | | | | capital. Your friend invests $2,000, and you cover the |
| S-corporation is held by shareholders, while an LLC is | | | | remaining $8,000. In the case of an S Corporation your |
| owned by members. Limited Liability Companies tend | | | | share of the profits would always be 80%, since you |
| to have less stringent management and ownership | | | | have 80% ownership (shares) in the company. |
| provisions, since they are not designated as a | | | | However, what if your friend is the primary worker |
| corporation. Corporations are very rigid in regards to | | | | and you both agree that he/she deserves a greater |
| decision making, they must use corporate minutes and | | | | portion of the profit. With the LLC entity, you would be |
| have regular meetings to make decisions. If you fail to | | | | able to distribute profits 60/40 or however you see fit. |
| abide by these rules in a corporation the IRS may | | | | An S Corporation would be much more complicated, |
| refuse to allow you to write off certain expenses and | | | | since you would have to allow your friend to buy out |
| assets. | | | | your shares in the company in order to change the |
| Additionally, an S corporation requires that all | | | | profit sharing structure. |
| shareholders be individual entities, while the members in | | | | Both structures are subject to self-employment tax, |
| an LLC can exist as individuals or even other business | | | | usually around 15% on average. The biggest |
| formations. To explain more simply, an LLC can be | | | | disadvantage to choosing a Limited Liability Company |
| partly owned by other corporations and LLCs, while an | | | | formation is that they will be taxed 15% on both profits |
| S Corporation can only be held by individuals (no | | | | and salary. An S Corporation will administer taxes on |
| organizations). If this is an issue in your particular | | | | distributed salaries, but not profits. |
| situation, it would obviously be the most advantageous | | | | |