The Limited Liability Companies (LLC’s) are now one of the most popular choices for incorporations over the sub-Chapter S Corporations.

Features of an LLC

• This type of entity is a form of business ownership that has several attributes of corporation and partnership structures.
• An LLC is neither a corporation nor a partnership.
• An LLC may be called a limited liability corporation, but the correct accepted terminology is Limited Liability Company.
• The LLC’s owners are generally referred to as members not partners or shareholders.
• The number of members of an LLC is unlimited and may be individuals, corporations, or other LLC.

Benefits of LLC’s over S Corporations

1. Lower Annual State Filing taxes:
First of all the Corporations have higher minimum taxes in most states (except in California where the minimum taxes are the same $800.00). In New Jersey, for example up to 2 member LLC does not require annual filing tax. However, with 3 or members the tax is $150 per member.

2. Simple to Dissolve:
The LLC’s in many states including most of the North East States are easy to dissolve without much effort. For example in New Jersey it costs only $100 to dissolve whereas the Corporation requires a lot more

3. No Minutes or Corporate Resolutions required:
Corporations are required to keep formal minutes, have meetings, and record resolutions. The LLC business structure requires no corporate minutes or resolutions and is easier to operate.

4. Flexible Profit Distribution:
Limited liability companies can select varying forms of distribution of profits. Unlike a common partnership where the split is 50-50, LLC have much more flexibility.

5. Allocation of profit or loss not dependent on % of shareholder ownership
For S corporations, the distribution of the net distributable profit follows a rigid method based on the percentage of ownership. However, the LLC’s net distributable share of the profit or loss is not dictated by the percentage of ownership.

Note: However, I would advise to consult a professional CPA to determine whether your unique circumstances and the applicable state laws for LLC’s merit the above benefits.

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Ask TaxGuru Please refer to the legal disclaimer.

Often incorrectly called a "limited liability corporation" (instead of company), it is a hybrid business entity having certain characteristics of both a corporation and a partnership or sole proprietorship (depending on how many owners there are). An LLC, although a business entity, is a type of unincorporated association and is not a corporation. The primary characteristic an LLC shares with a corporation is limited liability, and the primary characteristic it shares with a partnership is the availability of pass-through income taxation. It is often more flexible than a corporation and it is well-suited for companies with a single owner.
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Earl Nunes

A major factor that differentiates an S corporation from an LLC is the employment tax that is paid on earnings. The owner of an LLC is considered to be self-employed and, as such, must pay a “self-employment tax” of 15.3% which goes toward social security and Medicare. The entire net income of the business is subject to self-employment tax.*

In an S corporation, only the salary paid to the employee-owner is subject to employment tax. The remaining income that is paid as a distribution is not subject to employment tax under IRS rules. Therefore, there is the potential to realize substantial employment tax savings. Case in point:

Mary owns a print shop. In keeping with the industry standard, Mary decides that a reasonable salary for a print shop manager is $35,000 and pays herself accordingly. Mary’s total earnings for the year are $60,000: $35,000 paid in salary and the remaining $25,000 paid as a distribution from the S corp. Mary’s total employment tax is $5,355 (15.3% of $35,000).

If Mary were the owner of an LLC, she would have to pay employment tax on the entire $60,000, equaling $9,180. But as an S corporation, she realizes savings of $3,825 in employment tax.

One might assume that these savings could be further manipulated by reducing the salary to an extremely low amount and attributing the rest of one’s earnings to distributions—but this would be an incorrect assumption. In practice, the IRS is careful to notice whether a salary is reasonable by industry standards. If it determines a salary to be unreasonable, the IRS will not hesitate to reclassify distributions as salary.

Still, while the potential employment tax savings may make the S corporation an attractive structure for your business, bear in mind that you would then have to deal with all the paperwork associated with payroll tax. The payroll tax is a pay-as-you-go tax that must be paid to the IRS regularly throughout the year--on time, or you will incur interest and penalties. The paperwork alone can be an overwhelming task for someone who is not familiar with this; and if you expect to incur losses or otherwise experience a cash flow crunch during the year that would hinder you from paying the payroll tax when due, this could present a problem.

Owners of LLCs pay their self-employment tax once a year on April 15 when income taxes are normally due. Income tax filings are also relatively easy for the owners of an LLC: A single-member LLC files the same 1040 tax return and Schedule C as a sole proprietor; partners in an LLC file the same 1065 partnership tax return as do owners of traditional partnerships.