What Should You Choose? A Sub-S Corporation or an LLC

Business Insights

What Should You Choose? A Sub-S Corporation or an LLC

Aug 27, 2017 | Business Insights

LLCs and Subchapter S Corporations share a number of characteristics. Chief among them is that each provides participants – shareholders in a corporation, members in an LLC – with insulation from personal liability while avoiding the “double taxation” associated with C-Corporation status. Double taxation means that a C-Corporation pays taxes on profits and its shareholders pay taxes on distributions. However, Sub-S Corporations do not pay taxes at the corporate level.

Statutory Requirements

Sub-S Corporations are corporations, meaning that the statutory requirements of the form apply. Sub-S Corporations must hold annual meetings of shareholders and directors, conduct annual elections and file annual reports with the State Corporation Commission. Conversely, the LLC structure requires none of these things, allowing it to operate unimpeded by statutorily imposed formalities.

Additionally, the federal tax code imposes strict limits on Sub-S Corporations, restricting membership to 100 shareholders, each of whom must be a U.S. citizen or legal resident. With some limited exceptions, all shareholders must be individuals. Hence, a Sub-S Corporation cannot own another Sub-S Corporation, but an LLC can own other LLCs.

Ownership Advantages and Disadvantages

In a Sub-S Corporation, profits must be distributed in proportion to ownership interest. In contrast, LLCs have the flexibility to uncouple ownership from profit interest. Additionally, a Sub-S Corporation can have only one class of stock, while LLCs may be composed of multiple classes of members with differing rights. Generally speaking, owners of single member LLCs will pay self-employment taxes (Social Security and Medicare) on all of their income. Owners of a Sub-S Corporation must pay, or attribute to themselves, a “reasonable” salary. Self-employment taxation is limited to income designated as wages rather than all distributions. The benefit here is that a Sub-S Corporation can deduct payroll expenses like federal taxes and FICA and any remaining income above the set salary is distributed as dividends, which is taxed at a lower rate.

What to Choose?

There is no one size fits all answer to the perpetual question of preferred form of business entity. LLCs and Sub-S Corporations have obvious similarities, but their dissimilarities are equally significant. The entrepreneur and his or her advisors should carefully consider these distinctions, matching the characteristics of the entity form to the business goals.

LinkedIn

Follow us on LinkedIn to view the latest blogs from our team.

About – Business Insights

Our business blog focuses on issues affecting Virginia, D.C. and Maryland business owners as well as those in other jurisdictions throughout the country. We provide timely insight and commentary on federal and state rules and how they affect you. If you are interested in having us cover a specific topic, please let us know.

About – Employment Law

As employment law constantly changes, the attorneys at Bean, Kinney & Korman stay up to date on the law as it develops. Our blog topics focus on those changes and what you need to know about them, ranging from severance agreements and the FLSA to social media in the workplace and recent court decisions. If you are interested in having us cover a specific topic, please let us know.

About- Real Estate

This blog focuses on real estate, land use and construction-related topics affecting Virginia and the Washington, D.C. metro area. With topics ranging from contract drafting and negotiation to local and regional land use project updates, the attorneys at Bean, Kinney & Korman provide timely insight and commentary on the issues affecting owners, builders, developers, contractors, subcontractors and other players in the industry. If you are interested in having us cover a specific topic, please let us know.

Share This