LLC vs. S Corporation for Small Business

Today, I met with two small business owners that wanted to know whether they should incorporate as an S corporation or an LLC. I explained the differences in the two business entities.

First, the first major difference with an LLC and S corporation is flexibility. An LLC is a great business entityf or the right small business owners. Most small business owners do not use the benefits of an LLC. Flexibility is the major benefit of an LLC. For example, with an LLC, a small business owner can set it up like a partnership. This means that a small business owner can be creative and utilize the flexibility of an LLC to their advance. For instance, small business owners often have investors and/or key employees. One of the distinct differences with an LLC and S corporation is the ability to have two types of business ownership. Simply put, an LLC can have voting and non-voting ownership structures. This is a big deal because many small business owners do not want a business partner. Thus, a key employee or an investor can have limited rights with an LLC. This is not possible with ann S corporation because an S corporation only allows one type of stock. YOu cannot have voting and non-voting ownership interets. Again, most small business owners are either uninformed about the benefits of an LLC or will not take advantage of this attribute. Therefore, the S corporation is not a bad alternative.

The second trait is taxation. With an S corporation, a small business pays payroll taxes based upon the payment of a reasonable salary for their industry and considering their circumstances. In contrasts, an LLC pays payroll taxes based upon level of profitability. For example, a small business owner may have $100,000 in profits but re-invest most of these profits. Thus, with an S corporation, a small business owner can limit the payment of payroll taxes by only paying $30,000 of reasonable salary (example not literally). On 8 percent, this could be a significant savings for a small underfinanced business owner.

The third trait are costs. An S corporation has less costs in Illinois than an LLC. In Illinois, the filing fees are $175 for an Corporation. The filing fees for an LLC is $500. Add an additional $100 if you want your business to be recognized by the Illinois Secretary of State within twenty-four hours. The annual maintance fees are comparable to the initial incorporation fees. Thus, an S corporation is significantly less than the LLC. For this reason, the S corporation makes more sense for many small business owners. Again, you should seek a qualified business attorney to counsel you on the basic differences. In your situation, the LLc may be more valuable. Again, choice of business entity is based upon your individual and business circumstances.

Sean Robertson is a business and asset protection attorney. Sean Robertson can be reached at (312) 498-6080 or Sean@RobertsonLawGroup.com. Sean Robertson is a graduate of DePaul University College of Law and University of Illinois at Urbana-Champaign.