One of the first questions business owners ask when starting a new company or creating a new formation is “What business type is right for me?” In order for accountants to accurately walk their clients through the decision process, it is vital to fully understand the concepts of Limited Liability Corporations and S Corporations. Even though there are many similarities, here are the aspects that every CPA should know regarding the differences between LLC and S Corporations.
Limited Liability Corporations
Limited Liability Corporations offer a structure similar to a partnership, which brings tax benefits and easy management modifications. However, LLCs also act as corporations by limiting the amount of liability for which each member is responsible for.
According to the Internal Revenue Service, “owners of an LLC are called members. Most states do not restrict ownership, and so members may include individuals, corporations, other LLCs and foreign entities. There is no maximum number of members. Most states also permit ‘single-member’ LLCs, those with only one owner.”
In addition, the IRS explains that organizations such as banks and insurance companies are now allowed to be considered LLCs.
Even though fewer companies opt for this type of business formation, S Corporations offer a number of benefits to its members and owners. As the U.S. Small Business Administration explains, the only wages that are subject to employment tax will be those of shareholders who are also employees. The remaining income is paid to the owner and taxed at a lower rate.
“S corporations are corporations that elect to pass corporate income, losses, deductions and credits through to their shareholders for federal tax purposes. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates,” according to the IRS.
If both types of businesses seem appealing to your client, a third option is blending both LLC and S Corporations to form a corporation that is treated as an LLC from a legal point of view and as an S Corporation for tax purposes.
Every month, Surgent presents a variety of webinars that help accountants stay up-to-date with the latest trends and best practices within the profession. To attend a webinar on “The Best S Corporation, Limited Liability, and Partnership Update Course” by Surgent (BCPE), visit our website and register today!