Organizing Your Business Part 4: LLCs
In our last post, “Organizing Your Business Part 3: Corporations,” we looked at the different types for for-profit and nonprofit corporations. Now, it’s time to take a look at what makes LLCs different. LLC stands for Limited Liability Company. (Notice that the C stands for “Company” and not for “Corporation.”)
LLC vs. S Corporation
In many ways, an LLC is similar in structure to an S Corp. With each there is the tax benefit of only paying taxes on salaries, or draws, and not paying an overall tax on company income, as you would in a C Corp.
In both LLCs and S corporations, owners can deduct business expenses and losses from their personal tax liability each year.
And both LLCs and S corps offer protection of personal financial assets, meaning that if the company defaults on some loans or goes severely into debt, creditors cannot come after the personal assets of the company officers.
But LLCs also differ in some very important ways from S corps.
Anyone can own an LLC, including a corporation, person, or other LLC; the owners of Limited Liability Companies are called members or managers rather than shareholders. A non-resident alien can own an LLC. However, only US citizens can own S corps. S corps may only have up to 100 owners. LLCs are not restricted to any number of owners.
LLC Income and Profits
In an S corporation, profits are split amongst shareholders according to the percentage of the company that each shareholder owns. In other words, if you own 50 of 100 shares, you must get paid 50 percent of the profit.
An LLC provides more flexibility. In an LLC, officers of the company can decide to distribute the profits however they would like. This distribution still must be agreed to ahead of time.
Also, while it’s true that an LLC doesn’t have to pay tax on its overall business income and tax is only paid by the owners, unlike an S corp, the owners of an LLC must pay self-employment tax, which is 15.3 percent.
Other notes about LLCs
In general, LLCs allow more flexibility in ownership and also require less paperwork. S corps, however, have the added benefit of saving owners from paying self-employment tax.
Individual states set more specific guidelines for LLCs.
[Recommended Reading: “LLCs, S Corps, and C Corps: A Comparison“]