What Are the Benefits of an LLC Corp Vs. Subchapter S?
Weighing the benefits of forming an LLC or a subchapter S corporation depends on your long-term business strategy. Obtaining savvy advice from a financial or legal professional is important to help you determine which of these business structures is most advantageous for your business. Consider basic comparison points to lend insight into the benefits of each type of business structure.
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Limited Liability Company
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A limited liability company (LLC) is a combination of two business structures: a corporation and partnership. According to the Internal Revenue Service, an LLC has owners, called members, who are similar to corporate stockholders. Each member has a stake in the business based on the amount of investment in the business. Membership in an LLC is open to individuals, other corporations and foreign businesses. However, the particulars governing LLC membership and formation are regulated by state laws. Each state prescribes the type of registration paperwork required to register an LLC in a particular state.
LLC Benefits
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An LLC combines some of the benefits inherent in corporations and partnerships. For example, an LLC business structure gives business owners a more flexible framework with which to establish a management organization in the same way as a partnership. In addition, members of an LLC have limited liability if the LLC fails or engages in litigation. This protects the personal assets of an LLC member and the only money exposed to losses is the amount of money invested in the LLC. Although LLC members have similar ownership rights as corporate stockholders, members have the benefit of participating directly in managing the business, whereas stockholders do not. Most importantly, LLC members enjoy pass-through taxation. This channels profits and losses to the members where any profits are taxed through the tax return filings of each member.
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Subchapter S Corporation
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A subchapter S corporation is a corporation in every way except in the way the business is taxed. A subchapter S corporation requires business owners to register as a corporation and meet the formal formation requirements. For example, a corporation is required to have a board of directors and a management structure consisting of key positions like a president, secretary and treasurer. Business owners wishing to obtain subchapter S status must file Form 2553 with the IRS. Qualifying corporations must have no more than 100 shareholders and have only a single class of stock. Shareholders may include certain estates and types of trusts but not other corporations, partnerships or shareholders who are nonresidents of the U.S.
Subchapter S Corporation Benefits
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One of the chief benefits of a subchapter S corporation is to avoid double taxation. Corporations are typically treated as separate entities with the same rights as a person. Therefore, the IRS taxes the income a corporation makes in a given year and again when profits transmit to shareholders in the form of dividends or value appreciation. Shareholders claim these gains on personal income tax returns and pay tax as appropriate. Filing for S status allows income to flow directly to shareholders similar to an LLC. However, only qualifying businesses can apply for this status and such status is granted only by the IRS.
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