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This is a crucial decision in the life of any business. You may have already decided on the entity best for your venture, however, one should make the decision with the expertise of an Attorney and Accountant, and gain an understanding of the differences between the entities. It is less expensive to make the entity choice correct the first time around than to change it later, when complications arise.
Both the LLC and S-Corporation grant personal protection from debts and liabilities of the business. However, an S-Corporation has more formal management requirements than the LLC. A corporation must have a Board of Directors, conduct shareholder meetings and more. An LLC can be run more like a sole proprietorship without many of these formal requirements. However, if you plan to have several owners, a corporate structure may work better than the LLC. The corporate structure (shares rather than members) may keep ownership rights more clear and be more appealing to potential investors.
At the Federal level, both entities have pass through taxation in which profits and losses pass through the corporation and are reported to the individual tax return of the shareholder. For State Franchise Taxes, California levies a 1.5% tax on net income plus an $800 annual minimum franchise tax on S-Corporations. However, for the first year, there is no minimum. For an LLC, California levies an $800 per year minimum franchise tax, commencing the first year, plus an additional tax on total income levied on incomes above $250,000 per year.
While both entities have pass-through tax status, there is one potential tax advantage to the S-Corporation over the LLC that may be beneficial for your particular situation. To save money on taxes, it is possible to take a “reasonable salary” from an S-Corporation, avoid the employment taxes, and then take the rest as a dividend.
You may have made a decision after reading this article, however, it is best to consult an Attorney for your particular situation. There is no “one entity fits all” for all circumstances and businesses.
