S Corporation vs. LLC

Given the recent economic shift, there are many people that are in need of some extra money. Since they could not easily find a conventional job (or they were worried about losing their current job), the popular decision has been to take matters into their own hands. Individuals are finding that there are many opportunities to make money, and occasionally, these discoveries lead to a new, profitable business! With this newfound income, the next step is to make sure that all profits are handled legally. It’s time to decide what legal structure your company will be.


This is often a daunting task for new business owners. There are quite a few options to choose from, and each of them has their positives and their negatives. Mainly, the decision is between an S-Corporation and a Limited Liability Company (LLC), but I would like to quickly touch on one more option, since I know you’re probably curious. I’m talking about a Sole Proprietorship.

Sole Proprietorships are often frowned upon because this particular legal structure does not offer liability protection. If your company has many debts that cannot be repaid, your personal assets will need to be sold in order to cover those debts. This could mean your cars, your house, personal accounts….anything. I almost always advise against starting a Sole Proprietorship for this reason.

New Business

I’m sure that with all of these new business start-ups, there is quite a range in the size of these companies. Some may be very small – a one-person operation with no real customer interaction (other than online), whereas others might be quite sizable – a 50-person company that pays employee salaries and benefits. Is there one right option for each of these companies?

LLC

The LLC is a fairly basic way to legalize your business. Here are the main points of an LLC:

  • No real tax benefits to an LLC – in fact, in some states, this may actually increase your state tax percent because there are “franchise” taxes. Please refer to the Tax Foundation – this will show you if your state enforces this tax
  • Liability Protection
  • “Pass-through” entity for tax purposes – meaning, taxes will be passed through the owner, and filed through his/her personal income tax
  • Easy set-up and flexible for change
  • Profits divided according to personal agreements

S-Corporation

The S-Corporation is basically the next step up beyond the LLC. Here are the main points of the S-Corporation:

  • Not subject to Self-Employment Tax, which most likely means tax savings
  • Must have no more than 75 shareholders/employees, and they cannot be non-resident aliens
  • Are run the same as a C-Corporation (a large company like Coca-Cola is a C-Corporation), and all the same record keeping applies – this means that you’ll spend many more hours with your accountant vs. the LLC
  • “Pass-through” entity for tax purposes – meaning, taxes will be passed through the owner, and filed through his/her personal income tax
  • Profits are divided according to the ratio of ownership

So Which Set-Up is Right for my Business?

Ultimately, this is up to you (obviously), but it mostly depends on the size of your company. Let’s look at a few examples.

  1. Ron has recently started a blog and is already creating some revenue from advertisements, staff writing, and from SEO servicing. He does everything himself and therefore has no need for any employees. His yearly income is projected at about $8,000.In this example, since Ron does not have employees, it’s best if he keeps his business set-up as simple as possible. He should start an LLC.
  2. Lynn has always been great at styling and cutting hair. A few years ago, she was happy cutting her friends’ hair for free. It was relaxing and somewhat of a win-win. Lynn recently felt like her day-job was in trouble and decided to do something bold. She purchased a vacant retail shop and converted it into a hair salon. Lynn plans on employing 6 workers for now, but if it goes well, she might open up another salon in a nearby city.

Lynn’s business is much more complicated than Ron’s. She has to organize payroll and needs to withhold taxes from her employees’ paychecks; plus, she might even expand her business to another location, which would most definitely mean more employees. An S-Corporation would be best for Lynn. It will require her to focus more efforts on the accounting side, but she will benefit from the tax savings of the S-Corporation.

Is Your Business Simple? Go with the LLC

Most small businesses are run by one person, the owner. If this is the case with your business, you’ll most likely benefit from the LLC set-up.

Do you currently own your own business? Are you an LLC or an S-Corporation?

This is a guest post by Derek from Life And My Finances. Derek currently has his degree in Finance and enjoys using his knowledge to help others get out of debt, save money, and get rich!

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