What's an S-Corp And An LLC?

Here we are going to go over an S-Corporation & An LLC.

Let’s face it, not everyone is into paperwork…and formation and maintenance of a corporate entity requires a fair amount of it. On the other hand, it’s a relatively small matter to form an LLC. According to Nolo’s Guide to Starting and Running a Small Business:

“…the relative simplicity and flexibility of the LLC make it the better choice. This is especially true if your business will hold property, such as real estate, that's likely to increase in value."

That statement about property is something to think about if your Internet business is an informational website that generates income on its own, such as CraigsList or a pay-per-use site. Digital property has the same potential to rise and fall in value as real property (just ask AltaVista). Even if your website doesn’t generate income directly, if you’re getting a fair number of hits per month – say, 100,000 or more – simply the domain name (if you have one) can be valuable.

Beyond the fact that forming an LLC is a one-step process requiring little in the way of red tape, you won’t have to worry about annual meetings and keeping minutes of those meetings in the way corporations must do. Dividends of S-Corporations must be distributed among shareholders based on the number of shares they hold, regardless of whether or not they contributed to the business in any tangible way (in other words, YOU could put in the hours of actual labor while THEY sit around the pool waiting for the dividend check – which in theory, could mean your shareholders may wind up with the lion’s share of profits!) With an LLC, profits and losses are divided up among the members in any way they see fit. Finally, an LLC can be owned and operated by anyone, whether they are a citizen, a resident alien, or another person or corporate/business entity inside or outside of the U.S. An S-Corporation, on the other hand must be owned by a “natural person” who is a U.S. citizen or a legal resident – it cannot be owned by another corporation or person outside of the country.

Members of an S-Corporation pay Medicare and Social Security taxes only on money they actually receive as compensation in the form of wages or a salary – profits received as a dividend are exempt. In contrast, members of an LLC may be liable for these taxes on all profits made. This is especially true if yours is an online business that provides professional services in the fields of health care, the law or engineering and design. If this is the case for you, it’s a good idea to consult with your account or tax advisor on what is best for your business.

Another caveat for licensed professionals residing in the State of California: an LLC may not even be an option for you, since California law prohibits LLCs from rendering professional services as an individual. Other than that, California charges LLCs a yearly tax of $800 just for doing business in that state, plus an additional annual LLC fee based on a percentage of total yearly income from all sources.

You now know the difference between each of these corporation types. Take your time in choosing the one that's right for your business.