SubS_LLC

View LLC vs. Sub-S Corporation Comparison Chart

The LLC is essentially an incorporated partnership subject to hybrid rules whereas a Sub-S Corporation follows traditional corporation law.

If you are a small business owner and did not have a reason to specifically form an LLC, you should probably form a Subchapter-S Corporation. The problem is that for most people, the LLC doesn’t offer any real advantages over an S-Corp and has definite disadvantages such as unlimited self-employment tax liability for active owners.

An LLC should be considered:

	When the company will generate non self-employment income such as real estate rentals.
	When the company will have more than 75 owners.
	When an unequal profit distribution is desired, e.g. 10% owner gets 60% of profits, or multiple tiers of income distribution.
	Active Owners pay both self-employment and income tax on their Form K-1 amounts.
	Passive Owners pay only income tax on their Form K-1 amounts.
	One Owner LLC's are disregarded for income tax purposes. Income is declared on the owner's Schedule C, which has a three hundred higher audit rate than ordinary Form 1040's with no business income.

Example:

Five people own an apartment building and want limited liability. Maintenance is handled by a professional company.

Large legal firm has 100 partners and wishes to avoid corporate taxation.

I.E. 70 million dollar per year income assuming 20 million as dividends= 2.4 million SE tax less 5.7 million federal corporate taxes = 3.3 million taxes saved or extra $33,000 per partner.

Multi-level marketing firm wants to compensation owners/employees 50% for new business, 20% for returning business, etc.

A Sub-Chapter S Corporation should be considered:

	When the company will generate employment tax income, such as most business income. Employees pay employment taxes on wages. Note: Reasonable compensation must be paid (at least minimum wage times the number of hours worked per week).
	When the company only has a few shareholders.
	When an equal profit distribution is desired, e.g. 10% owner gets 10% of net profits, single distribution tier.
	Shareholders pay only income tax on their Form K-1 amounts.
	Shareholder Employees have payroll taxes withheld on their W-2. (Employer portion paid by Company)
	One Owner Sub-S Corporations must file ALL corporate and payroll tax returns. See note regarding reasonable compensation above.

Example:

Two people want to form a 50/50 ownership corporation which will have both employment and non-employment tax components.

I.E. Sales firm with $50,000 per year salesman (50%) and $20,000 office manager (50%) makes $230,000 income = $10,700 Payroll tax less $27,700 SE Tax = extra $8,500 per co-owner.

View LLC vs. Sub-S Corporation Comparison Chart