LLCs and Corporations for Small Business

Many small business owners wonder what are the differences between LLCs and Corporations for small business owners. In this blog, we will discuss three main differences between LLCs and Corporations.

The first main difference is the LLC offers a lot more flexibility than a S corporation. A LLC is a limited liability corporation and is a hybrid between a partnership and a corporation. A LLC is a disregarded entity for tax purposes because partners or individuals pay taxes based upon their own tax situation. Thus, the corporation does not pay taxes but rather individuals file a 1040 return based upon their income, deductions, and losses if any. In contrasts, an S corporation is also a pass through entity, but one distinct difference is treatment of payroll taxes. With an S corporation, a business pays payroll taxes on reasonable salary and not on profitability. With an LLC, business owners pay taxes on the profits of the corporation whether they took a distribution or not.,

The second difference is flexibility. An LLC is flexible and has different types of ownership interest. An S corporation only has one type of ownership interest. Thus, an S corporation does not have the ability to give an investor preferential rights upon liquidation of the business like an LLC. For example, a LLC can offer non-voting and voting shares to shareholders/partners. Often times, accounting and law firms will have different classifications of partners or members. Basically, this different classification is equity and non-equity partners.

The third difference is costs. An LLC is generally more expensive to operate in terms of initial and annual operating costs. In Illinois, an LLC costs $500 to incorporate where as a corporation costs $175. An LLC also has $250 to $400 in annual reports costs compared to $125 to $200 for a Corporation. In my opinion, most small business owners benefit from the S corporation unless they are entreprenerial and expect to offer partnership and ownership opportunities to key employees. Then, the LLC generally is a much more beneficial business entity because of its' flexibility.

Sean Robertson is a business and asset protection attorney that concentrates in small to medium sized business law. Sean can be reached at (312) 498-6080 or Sean@RobertsonLawGroup.com. Sean is a entrepreneur and loves representing fellow small business owners and entrepreneurs.