LLC Vs S Corp: Advantages & Disadvantages - Deciding What Is Right For Your Business 

By: Richard A. Caplan|LRL Writer  

For any entrepreneur embarking on a business venture and choosing the right legal structure can be a daunting task. Single owner proprietorship comes with many disadvantages unless one resorts to a legal business structure. S Corporations and LLC (Limited Liability Corporations) are preferred by most due to the liability protection that they offer along with other benefits. This ensures protection to the personal assets of the owner in times of a crisis which results in debts and the responsibility of the owner automatically becomes less. Both S Corporations and LLCs are good for tax purposes and eliminate chances of double taxation. So choosing either LLC Vs S Corp may make sense depending on your type of business.

Advantages of S Corporations 

In this case continuation of a business is guaranteed even if the owner or a stockholder quits or expires. Also ownership shares are included in the initial stock offering. Stock can be purchased, gifted or sold by just changing the ownership and not the business corporation. Furthermore unrecognized equity liquidations can be avoided as the finances and records of the stock owner are separate from the corporation's finances and records. Above all the personal responsibility of the stock owners are simplified and reduced due to the corporation's involvement. A corporate shield is in effect and the personal assets of the stock holders are not in the foray.

Disadvantages of S Corporations 

The limitation of liability can be negated as the lenders require personal guarantee from officers. Conflicts can arise and make decision making difficult among the stockholders. Moreover smaller stockholders can lose out on their investments as there may be restrictions imposed on the sale of stock or buy-back. Also gifting and inheritance may bring in to the fold people who are not capable or who may create a negative feeling in the group of stockholders. Sometimes the benefits paid by the corporation to stockholder employees may become too much and detrimental to the growth of the business. If ever the corporation is dissolved then the appreciated assets will be liable to high income taxes. Also regular corporations and their shareholders are subject to a double tax (both the corporation and the shareholders are taxed).

Advantages Of LLCs 

Owners involved in a LLC have the limited liability protection. The owners can enjoy flexibility of profit distribution, unlike a common partnership. Also LLC companies do not require holding regular meetings and passing a resolution which is a feature of Corporations. Corporations need to have regular meetings and as LLC dispenses with this they are easier to operate.

The real advantage is that all the profits, losses and taxes pass through the LLC to the members. This can be used to avoid double taxation like paying individual tax and corporation tax. The business tax liabilities are passed through and avoid double taxation. Furthermore, the simplicity and flexibility of LLC is a better choice for the majority of small business.

Disadvantages Of LLCs

Unlike Corporations, LLC is over as soon as a member dies or resigns. The public share status is not supported by LLCs. The LLC can make the business more complex and complicated. So in contrast to the Corporation, LLC is not a separate tax entity. All the profits, losses and taxes pass through the LLC owners. LLC owners (also called members) will be subject to 100% of the tax with their earnings.

Finally, deciding on whether LLC Vs S Corp is right for you, it may make sense by weighing the advantages and disadvantages for your specific type of business. When forming your business, it is highly recommended to consult with a CPA (Certified Public Accountant) for any taxation concerns and issues, as well as consult with a business law attorney to help you set-up with your business legal structure properly.

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