One question business law and corporate law attorneys hear frequently is, “My accountant said I should set up an LLC or an S-Corp., which should I choose?” Determining which structure is appropriate for a new business is important and is a setup for which business and corporate law attorneys frequently assist their clients. However, many clients do not realize what it is they’re asking when they pose that question.
Comparing an LLC and an S-Corp. is like comparing apples and oranges. An LLC is a “Limited Liability Company” which is an entity created by filing a Certificate of Organization with the Secretary of State’s office. An LLC has members who are issued units of ownership within the LLC. A corporation is an entity created by filing articles of incorporation with the Secretary of State’s office. A corporation has shareholders, a board of directors, officers, and far more legally required formalities than an LLC.
So simply, an LLC is a type of entity, whereas an S-Corp. is a form of taxation. The term “S-Corp.” refers to a form of taxation under subchapter S of the Internal Revenue Code. A taxpayer elects S-Corp. taxation by filing IRS Form 2553. The issue is so confused that in fact, popular legal self-help websites may offer users the option to “start an S-Corp.” when “starting” an S-Corp. is technically impossible – you’re only electing the manner how your business will be taxed.
Because of this difference, an LLC may seem attractive because of how it can be taxed. It can be taxed as a sole proprietorship, partnership, or a business can even elect S-Corp. or C-Corp. taxation. By default, a single member LLC is taxed as a sole proprietorship while a multi-member LLC is taxed like a partnership. Your decision on the form of taxation may significantly impact your bottom line. Depending on your situation, making an S-Corp. election can help decrease your self-employment tax liability. However, making an unnecessary S-Corp. election can waste time, money, and save you nothing in taxes. An S-Corp. election is just one of the many options available for taxation of an LLC, and failure to make the correct election may make fixing the mistake in the future difficult or even impossible.
If all of this sounds like a maze to you, you’re not alone! Let the business law attorneys at Carlson & Burnett, LLP answer these questions to help guide you through the process of setting up an LLC, and help you determine what form of taxation is appropriate for you. Whether it’s S-Corp., C-Corp., or no Corp at all, give us a call at (402) 810-8611 today.