What are the pros and cons of creating an LLC vs. S corporation?
A major advantage of or organizing your business as an LLC or an S corp is that you can protect your personal assets from the creditors of your business. Limited liability means you can't be financially responsible for more than your investment in the company. If you put in $10,000, and incur $11,000 in debt, you're only potentially liable for $10,000. Your creditors (check that, your LLC's creditors) can't 'pierce the corporate veil, as the phrase goes.LLC Pro's : The owner of a single member LLC doesn't have to file a tax return for the LLC, as they only report the activity on their personal tax return.Ease of Set up: Most LLC forms are only a single page for single member LLCs.Inexpensive to Start: The cost of setting up an LLC is also inexpensive, usually just a couple hundred dollars.Guidelines: The red tape involved in forming an LLC isn't as stringent as that involved with S corps, which also leads to savings on accountant and attorney fees, among others.LLC Con's : Self-employment Tax: Single Member LLC owners are required to pay self-employment tax on income generated in the LLC, which means making quarterly estimated payments to the IRS.Owners of LLCs must make sure they don't pierce the "corporate veil," meaning they have to operate the LLC separately from their personal affairs. The LLC must not be a shell but an operating entity. There have been cases where a business owner lost their protection because there was no distinct difference between the LLC and its owner.S-corp Pro's : The key advantage of an S corp is that it offers tax benefits when it comes to excess profits, known as distributions. The S corp pays its employees a "reasonable" salary, which means it should be tied to industry norms, while also deducting payroll expenses like federal taxes and FICA. Then, any remaining profits from the company can be distributed to the owners as dividends, which are taxed at a lower rate than income.S-corp Con's : S corps have more strict guidelines than LLCs. Per the tax code, you must meet the following standards to create an S corp:Must be a U.S. citizen or residentCannot have more than 100 shareholders (a spouse is considered a separate shareholder for the purpose of this rule).Corporation can only have one class of stockProfits and losses must be distributed to the shareholders in proportion to the shareholder's interest. For example, you can't have disproportionate distributions of dividends or losses. If a shareholder owns 10 percent of the S corp, he or she must receive 10 percent of the profits or losses.It costs more to form an S corp.Shareholders must adhere to the requirements at all times. If they don't, they risk disallowing the S corp election and the corporation would be treated as a C corp and its corresponding restrictions.Passive income limitation: You can't have more than 25 percent of gross receipts from passive activities, such as real estate investment.There can be additional state taxes for S corps.Shareholders should pay attention to paying themselves a "reasonable" salary for the work they perform for the S corp since the IRS is increasingly scrutinizing S corps for this.Given that it takes far less red tape to organize and is generally cheaper to administer, the LLC might be your best choice for you.Hope this was helpful, thanks.