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LLC vs S Corporation: Which is Better?
"S Corporation or LLC?" is a common question for new business
owners. I have several people call me each week asking this.
I always tell them the question is impossible to answer. And
here's why. An LLC is chameleon for income tax purposes.
Therefore, an LLC can be anything the owner or owners (who are
called members) want the LLC to be--including an S corporation.
An LLC with one owner, for example, can be a sole
proprietorship, a C corporation or an S Corporation. And an LLC
with multiple owners can be a partnership, a C corporation or an
S Corporation.
I think what people asking "LLC vs. S Corporation?" really want
are the answers to two questions: 1. Which legal form should
their new business or investment take? 2. What tax treatment
should they select for their new business or investment?
Fortunately, these questions can be answered--and quite easily.
To answer the question about which legal form a new business or
investment should take, I almost always give the same answer:
You probably want to use the LLC because an LLC gives you all
the same legal protection as a regular corporation only with
half the calories--er, I mean, red tape.
The tax treatment question that people ask is a bit trickier. As
noted earlier, an LLC can be just about anything. So making a
smart tax treatment decision is tricky and something you'll want
to consider carefully. Here are some of the issues to consider:
Investments and businesses that produce losses are often best
operated as a sole proprietorship or partnership so that the
losses pass through to the owner's or owners' tax returns and
create tax deductions. S corporations are often best if the LLC
operates an active trade or business and self-employment taxes
on the owner or owners are high. Note, however, that not every
business is eligible to become an S Corporation. If an LLC holds
real estate or other passive investments, an S Corporation or C
corporation is usually a very poor choice since the corporation
may create an extra level of taxation. If an LLC operates an
active trade or business that does business in many states, a C
corporation is often easiest for the owners because a C
corporation probably reduces the multistate income tax
accounting burden for the owners. Note that multistate tax
accounting often becomes very cumbersome for shareholders of an
S corporation.
About the author:
Bellevue-Redmond WA
author & CPA Stephen L. Nelson wrote both Quicken for
Dummies and QuickBooks for Dummies. He is also an adjunct tax
professor for Golden Gate University's graduate tax school.
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