While you are going through the incorporation process, one thing you will need to decide on is if you want to incorporate as an LLC or S Corp. Many small business owners have a tough time deciding between the two because of how similar the LLC is to the S Corp, but there is quite a distinction between them, which will make one better than the other for your business needs.

LLCs and S Corporations both offer the business owner personal asset protection, which is the main reason that people choose to incorporate their small business. Having the personal asset protection ensures that your personal assets cannot be used to settle business debts and liabilities. Both the LLC and the S Corporation also allow for pass through taxation, which means the business owner can claim the loss or profit on their personal taxes to help reduce their taxable income or increase it. This is where the similarities end.

One of the biggest differences between the LLC and the S Corporation is the self-employment tax. If you elect to form an S Corporation, you will get a self-employment tax break because shareholders in an S corporation are not subjected to self-employment taxes because they are paid a salary by the S Corporation. If you elect to form an LLC, you will have to pay self-employment tax on all of your income.

Another big difference between an LLC and an S Corporation is the way that profits and losses are distributed. In an S Corporation, profits and losses are divided among the shareholders based on how much of the business that the shareholder owns. In an LLC, the profits and losses can be spilt according to the operating agreement because LLCs allow for flexibility among the LLC members, but it must be specified in the operating agreement otherwise the state splits it how they see fit.

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Last Modified : January 29th, 2010 Filed under : Business Navigate : Previous post / Next post