When starting a business it is important to determine what type of legal entity the company is going to take. Many businesses are started by one individual which makes them a sole proprietor when they are starting.
As businesses grow they often get changed into a partnership or a corporation. If the owner decides that they want a corporation, there are two types that are more common than others, the limited liability corporation and the S Corp. The LLC has a lot of advantages over the S Corp.
Advantages of an LLC
There are four main advantages of an LLC. These are the basics but if you have questions about how this affects your family in case of a divorce or an inheritance, a qualified professional at National Family Solutions, can help you.
1. Distributions are Flexible
LLCs allow for businesses to be able to set up a corporation that is going to benefit the business. An LLC has a lot of flexibility when compared to how the S Corp is divided into shares based on the amount of money that has been invested into the business. The owners of the LLC are taxed for the profits instead of the business being taxed for them. So therefore profits can be distributed in ways that are different from the amount of money that has been invested in the company.
2. Ownership Can Not Be Transferred
Another advantage is that ownership of an LLC cannot be transferred. With an S Corp you can sell, give away, or will shares to another share holder. This can cause for there to be changes in the structure of ownership. When there is a death or bankruptcy the other owners of the LLC are able to set up a new ownership structure that works for them.
3. Less Paperwork
Less paperwork equals less time and money so this is a huge reason that an LLC is preferred over an S Corp. One thing that is different with an LLC is that there does not have to be regular meetings with the shareholders and there are no required amount of minutes that have to be kept. The LLC does not have regulations set forth for the board, minutes, or how resolutions are made. Managers and owners are able to make the decisions that need to be made when they need to be made. The administration still works with planning strategies but there are few other things that they focus on.
4. Lower Taxes
Lower tax rates are also important for LLCs when compared to S Corps. LLCs do not have a federal income tax but there is a state income tax in some states. There is a minimum tax in each state (it varies by state) that has to be paid by the LLC even if the business loses money or has no profits at all. Almost all states in the US have a lower minimum filing tax for LLCs than for S Corps. There are some states that allow LLCs with two members to forgo paying the state taxes. S Corps have a higher minimum filing tax than LLCs so the LLC pays a lower tax rate regardless.
While there are many advantages of LLCs some people still find that the S Corps is the right choice for their business. Learning more about the S Corps tax structure from the IRS is a great way to learn which choice is really right for you.