What is the Difference Between an S Corp and an LLC?

small business lawIf you are an entrepreneur going into business, a small business lawyer can advise you on a number of key decisions. One of the first decisions you will encounter is what type of business to form. You can incorporate, and have “Inc.” after your business name. This is, however, often not the most cost-efficient way to go into business.

Two of the most commonly used business forms are a Limited Liability Corporation (LLC) and an S Corp. An S Corp is named after the Internal Revenue Code’s Chapter 1, Subsection S.

Why Would I Make My Business an LLC?

A prime advantage to making your business an LLC is that you protect your personal assets – your house, your personal accounts, and your investments – from your business’s creditors. If, for any reason, your business becomes defunct or goes bankrupt, you do not want the bank to foreclose on your home.

An LLC is a “pass-through entity,” which means that any expenses and income from the business get reported on your personal income tax return. This can have tremendous tax advantages for you, as opening a new business is expensive – and you can deduct many of those expenses with the I.R.S.

Additionally, setting up an LLC is comparatively easy. It’s a single-page document for a single-member LLC. And if your LLC is just you, you do not need to file a separate tax return for the business. It all appears on your personal tax return.

LLCs are inexpensive to start, too. In most cases, it would only cost a few hundred dollars. Since there is less paperwork involved, it also means less money toward accounts and attorneys.

Why Would I Choose an S Corp?

The main advantage of an S Corp is the tax benefits it provides. If you have excess profits, or “distribution,” then those profits can be distributed to the S Corp’s owners as dividends. The I.R.S. taxes these dividends at a lower rate than what they would tax income.

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