S Corp vs. LLC?  What's Right for Me?  
by Adam E. Panek, CPA

Syracuse, NY - February 17, 2006 - Starting a new business requires making numerous preliminary decisions. One of your first choices is the type of entity in which you will operate your business. Should it be an S corporation or a limited liability company? Each of these forms has tax and non-tax advantages and disadvantages that must be considered in conjunction with your own plans and personal situation.

An S corporation offers liability protection. Therefore, your personal assets will not be at risk because of the activities and or liabilities of the S corporation, provided you do not personally guarantee the debts of the corporation. S corporations do not generally pay corporate income tax. Income, gains, losses, deductions and credits are passed through proportionately to each shareholder and taxed on their individual tax returns. Self employment tax is not owed based on the regular earnings of the S corporation; FICA tax would be owed on the salaries paid to employees and shareholders. S corporations do have some limitations, however. An S corporation is limited to 100 shareholders. This restriction can limit the growth potential and access to capital in some businesses. Shareholders may not be another corporation, a non-resident alien or most estates and trusts. An S corporation may only issue one class of stock; this limits how income and losses may be allocated to the shareholders. Shareholders basis cannot be increased by the corporation’s debt, even if the shareholder has personally guaranteed it.

Limited liability companies (LLC’s) provide liability protection similar to that of an S corporation. LLC’s are typically taxed as partnerships. That is, income, gain, losses, deductions and credits are passed through to each member of the LLC and reported on their individual tax returns. LLC’s are not limited to the kind or number of members, thus giving them greater access to capital. LLC’s are not limited to one class of stock, as are S corporations. This provides LLC members greater ability to allocate income, gains, losses, deductions and credits to it members. In many instances, members’ basis can be increased by the debts of the LLC. LLC’s do have some drawbacks. Several states impose LLC filing fees based on the number of members. For example, New Jersey charges a fee of $150 per member (maximum of $250,000) and New York State charges $100 per member (maximum of $25,000). Whereas an S corporation in New York State pays what is called a fixed dollar minimum tax which is based upon the gross payroll of the company. For example, a New York State S corporation with gross payroll of $500,000 or less would only pay $100, regardless of the number of shareholders. The maximum fixed dollar minimum tax is $10,000 for New York State S corporations. Also, income passed through to members in some instances may be subject to self employment tax which may be significant in a profitable business.

With all these considerations, should your business be an S corporation or an LLC? The answer depends on your particular set of facts and circumstances. If your business is profitable and you want to avoid self employment tax, an S corporation is the way to go. Most start-up ventures should at least consider operating as LLC’s, and existing sole proprietorships should consider conversion; that way the owner's personal assets will be protected from any financial problems that arise in the business. Real estate partnerships are especially suitable candidates to be treated as Limited liability companies. Overall, the LLC is a much more flexible business entity while still providing some of the best qualities of S corporations.

As with any business decision, entity choice should not be taken lightly or entered into without the consultation of your Certified Public Accountant. If you would like more information on this issue please feel free to contact Adam Panek at 315-701-6328 or apanek@GreenSeifterCPAs.com.

Green and Seifter CPAs offers a wide array of professional services spanning decades of experience in the areas of accounting, auditing, bookkeeping, financial planning, fraud, and taxation to individuals and businesses throughout Central New York.

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