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What Is The Difference Between an S-Corp And an LLC – 2020 Guide

If you’re planning on opening your personal firm, there are a few examples of enterprise entities that you can opt from. S corps and LLCs are the most common options, however, they are different in some ways, especially if you take a look at the management infrastructure and taxes. Keep in mind that some businesses might need both of these options to operate.

Before you actually start your firm, you’ll need to know about these different business types that you can choose from, and luckily for you, this article will be able to help you exactly with that. Let’s take a closer look at what options you have, as well as the variations between them:

LLC: Explained

An LLC or as it is commonly introduced as a Limited Liability Company is an organization model that is designed to protect all individual assets of the owner. So, if a firm gets find itself in the middle of some legal issues or if it is solicited by a debt collecting organization, the lender won’t be able to go after the individual assets, instead, only the company’s assets.

If the firm is charged as a single proprietorship, it does have several tax perks of being a such an organization, which implies that its revenue goes through the firm to the LLC affiliates, hence, they’ll have to state their incomes on the personal tax returns instead of completing a corporate one. The proprietors of these firms must pay taxes for their income.

If you choose to be an LLC, you’ll first need to register as one. Luckily for all new entrepreneurs, there are websites such as BestLLCFillingServices that offer these services, which means that you won’t need to go through the tiring, complex, and often time-consuming process of doing it on your own.

S-Corp: Explained

An S-corp, also commonly recognized as an S corporation is actually a tax option that allows the IRS to be aware of the fact that your firm needs to be taxed as a partnership. Additionally, it will also prevent you from being double-taxed. Similarly to the first option, you’ll need to register your partnership as such if you want to operate.

In such an organization, the owners are introduced as shareholders. Although you’re the owner, you’ll actually be viewed as a worker of the organization, meaning that you’ll need to give yourself a salary. All the revenue, assets, failures, as well as deductions, are taxed at the level of the shareholder.

Now, in order to qualify as such an enterprise, your firm needs to have at least one shareholder and a maximum of 100. Keep in mind that your company needs to be in the country you are living in and you’ll need to register with the IRS as a firm that will operate in your country.

So, What Is Different Between The Two?

When someone is just starting out as an entrepreneur, they often opt for an LLC mostly due to the fact that it offers more flexibility than an S corporation. However, before you rush and make a decision that you might regret later on, you should learn all the differences between the two options:

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  1. There Are Differences in Taxes

As mentioned earlier in the article, an S enterprise is not an entity as an LLC. Instead, it is an option for you to determine the way in which your company will be taxed. As such, you’ll be able to avoid being double-taxed, which means that you won’t be taxed on your revenue and then once more on the dividends the owners get as their earning.

On the other hand, with an LLC, owners need to pay the self-employment taxes, which are basically medical (2.9%) and social security (12.4%) taxes. Any revenue that is generated by the company can be and often is considered to be an income that can be completely taxed.

  1. The Infrastructure is Different

When people manage an LLC, it converts into a partnership, or if there is only 1 person running the business, then it is considered to be a single proprietorship. If it is run by a manager or managers that it might resemble a corporation more, especially since the members won’t be associated with all the decisions made on a daily level.

However, with an S corporation, it is often controlled by the directors, as well as the deputies. The board of directors will take care of the conventions, and the board will also be in charge of making all the crucial choices in the company. But, they do not deal with daily business tasks, instead, they choose officers such as heads of departments that will take care of this for them.

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  1. Daughter Company & Stock Limitations, And The Shareholder Infrastructure

As you may remember from the beginning of this list, an S-corp cannot have more than 100 stockholders, however, an LLC could have as many members as it wants. If you’re living in the United States, you should know that an S corporation will not allow non-US citizens to be a shareholder, while an LLC will.

Additionally, there are various restrictions when it comes to the daughter companies that you might want to open. These daughter companies are also referred to as subsidiaries and an LLC will allow you to open one without any restrictions or problems. However, with the other option, you cannot set a subsidiary.

Lastly, but not least important, if you opt for filling for an LLC, you won’t be able to distribute stocks which is something that could cause some problems in the future. An S-corp could distribute stocks, but, you’ll be able to have only 1 type of stock.

Conclusion

As you can see, there is a wide range of variations between an LLC and an S corporation. Hence, if you’re a new business owner or if you’re thinking about opening and running your own firm, you should know that you’ll have a lot of things to consider before actually being able to operate in your country.

So, now that you know what the variations are, you might not want to lose any more time. Instead, you should do some more digging on the Internet, and then you should start thinking long and hard about which option might suit your requirements and needs best.

About Peter Janos

Peter Janos

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