What is the difference between S Corp and LLC?
Hi there, my friend is looking to start an s corp.
What is the difference between setting up an S Corp or LLC?
Also, if she is in a co op apartment is she better of getting a P.O. Box and not registering her business under her apartment?
Thanks for your help.
Yes, she should get a PO Box - it looks more professional than a home address.
Most of the differences between S-Corp and LLC involve filings and taxes. For instance an individual owned LLC does not have to file separate taxes like an S-Corp. In NY, start-up costs are actually be more expensive for an LLC in addition, you could spend 1K just publishing your LLC's name in two newspapers as required in addition to everything else.
LLC's don't have to deal with corporate formalities, but an S-Corp' existence is perpetual. If a member of an LLC passes away or withdraws, it can cause dissolution of the LLC.
One of the many reasons I chose an S-Corp instead of an LLC is that I am both owner and employee, so I get a paycheck which comes in handy when filling out forms for a loan refinance, mortgage application, kids' financial aid for college, etc. Also, I only pay self-employment tax on that salary instead of my business's entire net revenue.
Another difference is how your business is perceived by some people like investors, bankers, even clients - corporations are often more respected and thought of as more "serious" than an LLC
NOTE - NYC tends to have their own set of laws and rules, so you may want to double-check.
The difference between LLC and SCorp is related to how the business/owners will be taxed. From a legal standpoint LLCs are generally easier to setup and maintain (i.e. business owners can avoid annual corporate filing requirements) than corporations. However, you can work with a tax professional to elect to be taxed as an SCorp. The cool thing here is that you can legally be an LLC and be taxed as an SCorp!
Of course, each situation should be taken into account separately; however, some considerations to think about. From a federal taxation standpoint a single owner LLC is taxed as a "disregarded entity". Basically, the owner will file a separate schedule (Sch C/E) alongside their 1040 for the business activity of the LLC. However, an SCorp has a separate return that must be filed (1120S). SCorps give business owners more flexibility from a federal taxation standpoint. The sex appeal here is that business owners can avoid self-employment taxes by paying themselves a reasonable wage below the profit of the business. Basically, the business owner is avoiding Social Security and Medicare taxes by paying a wage below the profit of the business. However, paying wages will trigger additional payroll tax filing requirements (ie generally forms 940, 941). Check with your state employment security and L&I departments for rules regarding exempt officers of an SCorp. Another consideration, saving on self-employment taxes will likely impact the business owners social security benefits as the individual will be paying LESS social security tax NOW thereby reducing the benefit level in the future.
Again, the best answer here is the difference between an SCorp and LLC is TAXES!
And yes, PO Box is ALWAYS the best way to go!
There are many differences. I could describe these differences but I think everyone here did a pretty good job. But what it boils down to are two things: (1) taxes and (2) LLCs are much easier to maintain than corporations.
The reason you care about item (2) is liability protection. It is very easy to pierce the corporate veil here in California. Using the corporate form requires certain minimum annual actions to preserve your liability protection that is much more extensive then what is required under the LLC entity structure. Also LLCs afford better liability protection then a corporation due to the "charging order" provision which limits a creditor's recourse.
With respect to item (1), taxes can go either way. It may be advantageous to use an S corp or better to use an LLC. It depends on your facts and circumstances.
Hope this helps.
A limited liability company is created under state law, which is also true for corporations and partnerships. Under our federal tax system, the LLC is taxed as either a partnership, a corporation, or, a sole proprietorship. A one member LLC can be either a sole proprietorship or a corporation. A LLC with two or more members can be classified as either a partnership (the default classification) or as a corporation. See the IRS Check the Box rules on Form 8832 "Entity Classification Election" and related instructions). Taxation will depend upon the entity classification. Note a LLC that elects to be classified as a corporation can elect Subchapter S treatment. Further, a LLC is either member managed or manager managed, as compared to a corporation that has a board of directors.
A corporation created under state law which qualifies as and files a timely subchapter S election (IRS Form 2553 "Election by a Small Business Corporation") will file an annual Form 1120S. The S corp's distributable net income will be allocated to the shareholders based upon stock ownership. As compared to a corporation, there is no taxation at the entity level for a S corporation except under limited special circumstances. There are numerous requirements and restrictions for S corporations that do not exist for corporations filing annual Form 1120 and partnerships filing annual information return Form 1065 such as (1) type of corporation eligible for S Corp status, (2) limitation on number of owners, and (3) types of owners (eligible S Corp shareholders).
For tax purposes her business can use a PO Box; but if she creates a corporation under state law, the agent for process for the corporation will need to state a street address. She does not necessarily need to act a agent for process for her corporation.
Make sure your friend consults with a Tax Attorney or a CPA for the specific requirements, advantages and disadvantages of each type of entity and the state law requirements for each type of entity. There is also quite a bit written on the subject on the internet and at her county library.
As the other posts indicate, costs and set-up steps can vary by state. An S-corporation and a single-member LLC (absent an alternative tax classification election) both achieve pass-through tax status for the owner. LLC's allow tremendous flexibility and do not necessarily need to be run with all of the formalities of a corporation, although certain minimum recordkeeping just makes good sense from a governance standpoint. The corporate form will require certain minimum annual actions to preserve the liability protection afforded that entity type and again, the maintenance of records and approval of actions that follow good governance practices. Assuming a single-owner for both, not a tremendous difference in the day-to-day.
Do advise your friend to have an attorney set up the entity rather than using one of those DIY sites. It's MUCH better to have a knowledgeable professional draft documents tailored to the specific business rather than the 'one size fits all, fill in the blank' forms that come from those sites.
My NY clients do generally recommend S-corporations over LLC's because of NY's archaic publication requirement, which depends on the county location of the business and can run from $350 +/- (Albany) to $1,200 +/- (NY). But Tax and Legal should both help determine the best entity type.
I'd be happy to recommend someone if needed.
TAXES. Run for the hills unless you really have lots of money at stake. Keep it simple, IMHO. Once you set up an S-Corp, it's very difficult to change it.
You can legally be an LLC and file as an S-Corp. LLC's are not always neccessary.
Yes, a PO Box makes sense in many cases.
LLC's are important if you require an extra degree of liability protection that an S corp. does not. Remember that an S corp is a tax strucure as is an LLC as is a C Corp. If you have liability risk, you choose the LLC. LLC's make sense as an example for professional services such as accountants, lawyers, architects, financial advisors, engineers etc. If you do have liability concern, then personal Errors and Omissions policy should accompany you plan. You would want to raise the level of your personal liability area in your auto insurance and lastly add a personal umbrella policy as well. Again, all of that if you have significant liabilty.
For many small, single-owner service-oriented businesses, using an LLC that files an election to be taxed as an "S" corporation provides a useful combination of liability protection, administrative simplicity, flexibility, and self-employment tax savings--particularly for a small business that is generating meaningful operating profits. The terminology gets confusing because you can be an LLC for state law purposes that gets taxed as an "S" corporation. As noted by others, there are restrictions on "S" corporations, but in my experience those restrictions rarely present problems for the typical single-owner small business.
Another tip is to get feedback from both your business attorney and your accountant before moving too far in one direction or the other...keep all members of your team on the same page.