Startup Structure Question: Why and when are LLCs preferable to S corps and vice versa?

Answer #1: If now or soon contemplating employee stock options and/or bringing in outside investors, then corporation status is probably desirable.  And … you can later convert from S to C.

Answer #2: Otherwise, LLCs are more desirable.

Pass-Through Entities

Both S corps and LLCs are pass-through entities, meaning that income will not be taxable at the company level, but only taxable to the owners.  This distinguishes these 2 entity types from traditional “C” corporations, which must pay taxes both at the company level and later when distributed to the shareholders.

Tax Advantage – S Corps

S corps have one – potential – further tax advantage over LLCs, in the ability to effectively reduce an owner’s self-employment taxes by paying the owner a salary versus dividends.  So, for example, assuming two companies, one an S corp, the other an LLC, both earn $100,000 in income.  The S corp could pay the owner $50,000 in salary, and the $50,000 balance would be deemed dividend income to the owners or owners, and not subject to self-employment taxes.  The salary portion is subject to self-employment taxes, while the dividend portion is not.

Using the same figures for an LLC, the full $100,000 would be deemed income to the owner subject to self-employment tax.

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In today’s podcast, we discuss some practical operational differences between limited liability companies (or, “LLCs”) and corporations.  We’re specifically interested in covering what corporate formalities are required for the 2 different types of business entities, and what are the differences and similarities.

One of the big attractions (to some) of LLCs is the almost complete LACK of legal requirements for annual corporate formalities.  I want to drill down a bit on this and examine how true this is, both in legal reality and in practical reality.

My guest today is Michael Steger, Principal of Law Offices of Michael D. Steger, PC, a firm with offices in New York City.  Mike’s practice focuses on litigation, intellectual property, entertainment, media, and corporate and other business matters.

Please click the link below for the podcast.

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LLCs vs S corps: Income and Tax Differences: These income and tax questions are frequently asked when individuals and partners contemplate forming a new company.  Basically, am I better off with an S-corp or an LLC?  There are several non-financial benefits (which I lean toward) in favor of the LLC over the S-corp, particularly the LLCs structural flexibility.  Many articles and blogs have been written about that subject and I will link to some of the good ones later.  For now, I wanted to address some of the more ambiguous questions about the two legal entities impacting the entity decision, namely whether the choice makes a basic tax difference for the principal owners.

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