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Ajay Kumar, CPA


S-Corp vs LLC

A come across this question quite often, so I summarized a quick overview of both types of business structure. Both LLCs and S-Corps are flow-through entities from the tax perspective and provide some measure of personal liability protection and overall legitimacy. They're both good options, especially, if you're looking to upgrade from a sole proprietorship or a partnership, or if you are just starting a new business.
If you are planning on selling stocks (Equity) and if you want the most possible protection, and if you are planning on looking for investors then S-Corp may make better sense. Conversely, if you don’t want to sell stocks, want less paperwork, but want a cheaper flexible structure, consider an LLC. Keep in mind that neither LLCs nor S-Corps necessarily shields owners from their or their employees' tort actions.

Pros and Cons of the LLC
  • Operational ease (No requirement to have formal meetings and keeping minutes) 
  • Less Start-up Cost (& less expensive to maintain)
  • Owner of an LLC is considered to be self-employed and must pay the self-employment tax Child support payments; (please note child alimony award is taxable)
  • Gifts, bequests and inheritances; (certain restrictions apply)
  • Welfare benefits;
  • Damage awards for physical injury or sickness (punitive awards are normally taxable);
  • Cash rebates from a dealer or manufacturer for an item you buy;
  • Reimbursements for qualified adoption expenses.
  • Life insurance proceeds paid to you because of an insured person’s death (however, cash redeemed over cost from a life insurance policy is taxable), and
  • qualified scholarship is normally not taxable as long as meant/used for tuition and required course books (room & board portion are normally taxable)
An LLC may only have two of the four characteristics that define corporations: 'Limited liability to the extent of assets, continuity of life, centralization of management, and free transferability of ownership interests. Therefore, if you wish to have more than two of these characteristics, you'll need to convert to a corporation.
Pros and Cons of the S-Corp

  • The tax savings for the shareholder, no self-employment tax (but a reasonable salary must be paid to the employee owners)
  • Business has an independent life separate from the shareholders (e.g. if a shareholder dies, leaves the company, or sells his or her shares the S-Corp can remain)
  • Clearer lines are defined between the shareholders and the business that improve the protection for the shareholders.
Ajay Kumar, CPA

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New Jersey 08831, U.S.A.

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