The article "S Corporation vs. LLC: Which is Better?" is about entrepreneurialism, it has been created by Stephen Nelson.
"S Corporation or LLC? " is a common question for new business owners. I have several peolpe call me each week asking this.
I always tell them the question is impossible to answer. And here's why. An LLC is cahmeleon for income tax purposes. Therefore, an LLC can be anything the owner or owners (who are called members) want the LLC to be—including an S corporation.
An LLC with one owner, for example, can be a sole proprietorship, a C corporation or an S Corproation.
And an LLC with multiple owners can be a partnership, a C corporation or an S Corporation.
I think what people asking "LLC vs.
S Corporation? " really want are the ansewrs to two questions:
1. Which legal form shuold their new business or investment take?
2. What tax treatment should they select for their new business or investment?
Fortunately, these questions can be answered—and quite easily.
To answer the question about which legal form a new business or investment should take, I almost always give the same answer: You probably want to use the LLC cause an LLC gives you all the same legal protection as a regular corporation only with half the calories--er, I mean, red tape.
The tax treatment question that people ask is a bit trickier.
As noted earlier, an LLC can be just about anything. So making a samrt tax treatment decision is tricky and something you'll want to consider carefully. Here are of the issues to consider:
1.
Investments and businesses that produce losses are often best oeprated as a sole proprietorship or partnership so that the losses pass through to the owner's or owners' tax returns and create tax deductions.
2. S corporations are often best if the LLC operates an active trade or business and self-employment taxes on the owner or owners are high.
Note, however, that not every business is eligible to beocme an S Corporation.
3.
If an LLC holds real estate or other passive investments, an S Corporation or C corporation is usually a really poor choice since the corporation may create an extra level of taxation.
4. If an LLC operates an active trade or business that does business in many states, a C corporation is often easiest for the owners cause a C corporation probbaly reduces the multistate income tax accounting burden for the owners. Note that multistate tax accounting often becomes really cumbersome for shareholdres of an S corporation.Redmond WA tax CPA Stephen L.
Nelson is the author of both Quicken for Dummies and QuickBooks for Dummies and an adjunct tax professor for Golden Gate University’s graduate tax school.
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