LLC Vs S-Corp – What Are the Tax Advantages, Disadvantages, How To Restructure, When To Restructure?

Selecting the right business structure for your business is crucial for success. When it comes to forming a business, you are likely to come across the terms LLC and S-Corp. LLC stands for Limited Liability Company. It is a type of legal entity that offers a more formal business structure when compared to a partnership or sole proprietorship. It even provides protection against personal liability.

Although an LLC and S-Corp are two terms that are used side-by-side, they refer to different aspects of the business. An S-Corp is a tax classification, whereas, an LLC is a type of business entity. It informs the IRS that your business needs to be taxed as a partnership. You first must register your business as a C-Corp or LLC if you want to become an S-Corp. There are specific guidelines that need to be met to form an S-Corp.

LLC

An LLC is very popular as it offers liability protection. It also offers tax benefits as it is taxed differently when compared to a traditional corporation. A company of any size can become an LLC such as a dentist’s office, a dental clinic, or even a real estate firm. It is quite common for family members to form an LLC to conduct business. An LLC allows an unlimited number of owners who can either be U.S. citizens or non-U.S. citizens. Business operations are a lot simpler for LLCs as the requirements are minimal. Although LLCs are encouraged to follow the same guidelines as S-Corps, they are not legally bound to do so.

Pros

• Limited liability.
• Easy to establish and operate.
• Tax benefits in the form of company income not being taxed at the business level and again at the personal level. Instead, the income is only reported on the owner’s personal tax return.
• Extremely flexible structure.

Cons

• More costly to set up in comparison to a sole proprietorship or partnership.
• Cannot attract outside investment.
• An annual report must be filed which costs hundreds of dollars.

S-Corp

An S-Corp helps protect the personal assets of the business owners in the form of dividends. It also ensures that double taxation is prevented. However, it is worth mentioning that the IRS tends to be more restrictive when it comes to S-Corp ownership. An S-Corp cannot have over 100 members and can only be owned by U.S. citizens. Moreover, S-Corps have a more rigid structure. There are plenty of internal formalities that have to be met such as adherence to corporate laws, holding of annual meetings, keeping company meeting minutes, and following the regulations in place for the issuance of shares.

Pros

• Personal liability protection.
• No taxes at the corporate level. Thus, only personal taxes are paid.
• Increased credibility.
• Dividends are paid.

Cons

• More fees are involved.
• Increased regulations have to be followed.
• Less control.

How to Restructure and When to Restructure?

It is possible to change your LLC into an S-Corp to save money on taxes. However, you must meet the IRS requirements to be able to restructure. You should only restructure to an S-Corp if all the members of your company are U.S. citizens and you are willing to adhere to the strict regulations. We can help you restructure from an LLC to S-Corp.