So You Want To Decide Between An S-Corporation and a Limited Liability Company (LLC)?

S-corporations and Limited Liability Companies (LLCs) are similar. Both are pass-through entities from a tax standpoint. That avoids the double taxation of C-corporation dividends. Both provide limited liability to the owners of the business.

While corporations have shareholders, LLCs have members. Corporations have officers; LLCs have managers. So, what are some points you might consider when selecting between a LLC and an S-corporation?

1) Cost/ease to establish the business structure. S-corporations can usually be established as inexpensively as LLCs. LLCs often spend money in attorney fees to develop a proper membership operating agreement. But, both structures can be formed by yourself or with the assistance of legal counsel.

2) Ease of ongoing administration. Corporations are more formal. You'll need to maintain corporate minutes and document corporate actions. Many good books help you learn how to do this. Once you're familiar with the process, documenting corporate actions isn't that difficult. (The Corporate Minutes Book helps corporate owners in this regard).

3) Self-Employment/Employment Tax issues. Members who are active in running a LLC need to pay employment tax on their earnings. S-corporation owners have the option of paying lower wages and more in distributions. This can save thousands of dollars in employment taxes. In my view, this is one of the biggest factors favoring the S-corporation. This is discussed in more detail in How To Start And Run Your Own Corporation: S-Corporations For Small Business Owners.

4) Flexibility of structuring financing arrangements. As I mention in How To Start And Run Your Own Corporation: S-Corporations For Small Business Owners, LLCs offer more flexibility as to how ownership and return can be structured than does a typical S-corporation. However, the S-corporation structure seems to offer adequate financing capability for most entrepreneurs. (However, in some cases, a LLC will work better. For example, if you have non-resident aliens as investors, a LLC is preferable at present, due to restrictions on who may own shares in an S-corporation.)

Many good books exist to help you understand both corporations and Limited Liability Companies. I've listed some below.

Nolo's Quick LLC

Your Limited Liability Company: An Operating Manual
by Anthony Mancuso