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How do LLCs and S corps differ under business law?

On Behalf of | Nov 5, 2018 | Business Law

Business owners have a lot of stake in their enterprise, financially and personally. They may work hard to see that their business is a success. However, they may also want to be shielded from personal liability for the debts and actions of the business. This can be done by structuring the business as either a limited liability corporation or as an S corporation.

Both of these entities protect the business owner’s personal assets, meaning that the business’s creditors cannot go after the owners’ personal assets to fulfill the business’s liabilities. There are also tax advantages to each of these business entities. However, LLCs and S corps differ in the way the business owners are paid. Owners of an S corp receive a salary along with dividends from the business’s profits. In an LLC, however, the business’s activities are reported on the business owner’s personal income taxes. However, this does mean they will have to pay self-employment taxes each quarter on the business’s income.

LLCs only need one person to be formed, and the paperwork often consists of a single page. Moreover, LLCs are relatively inexpensive to form. Also, the guidelines for forming an LLC aren’t as strict as those for forming an S corp. S corps have tax benefits with regards to any extra profits the business makes. However, there are stricter guidelines that must be followed to form an S corp, compared to an LLC. S corps must follow all relevant government regulations as well.

In the end, choosing whether to establish a business as an LLC or an S corp is a personal decision, that is often dependent on how many owners want to be involved and how they want to be paid. There are similarities between LLCs and S corps, but there are also important differences. Therefore, prospective business owners will want to ensure they understand all the business laws that will apply to these choices before proceeding, so they can make decisions that are in their best interests.