S corps offer both disadvantages and advantages in comparison to an LLC
When Oklahomans decide to start a new business, one of the first things they have to do is decide upon a business structure. The website Daily Worth observes that choosing a business structure is a critical choice that deserves serious consideration given that there is no “one-size-fits-all solution.” The decision on entity type will have an impact on your exposure to personal liability as well as how much you and/or your company pay in taxes each year. The choice of business entity can also affect how many owners or shareholders your company can have.
The U.S. Small Business Administration states that, of the business entities to choose from, the limited liability company and the Subchapter S corporation are two of the most popular entities chosen by entrepreneurs. In recent years, the LLC has become the most preferred form of business entity. As to the S corp, Forbes magazine notes that it is, by far, the most prevalent type of corporation in the United States.
The LLC and the S corp offer some of the same benefits. Both share the distinction of being “pass-through” entities, meaning that profits and losses pass through to the business owners’ personal tax returns. Therefore, the business is not taxed itself. Only the S corp shareholders or LLC members are taxed on business profits. In addition to pass-through taxation, the LLC and S corp are similar in that the personal assets of LLC members and S corp shareholders cannot be seized to satisfy liabilities of the business.
While the LLC and S corp are similar in some respects, there are also key differences. According to Entrepreneur magazine, one of the features that distinguishes an LLC from an S corp is its more flexible and less-stringent operating procedures. For example, in contrast to an LLC, an S corp will need to hold shareholders meetings and keep corporate minutes. Another key distinction pertains to profit sharing. LLC members are free to decide among themselves how they want profits (and losses) allocated. As to an S corp, each shareholder must share in the income in direct proportion to their ownership interest.
The SBA notes that the stock of S corporations can be freely transferable while membership interests in an LLC are often not. S corps are also viewed as advantageous in terms of self-employment taxes in comparison to LLCs since only the wages of an S corp shareholder who is an employee are subject to employment tax while distributions to that person are not.
According to the IRS, to qualify for S corporation status, a corporation must meet certain requirements. For example, the S corp must be a domestic corporation having no more than 100 shareholders and only one class of stock. In addition, to be an S corp, a corporation can “have only allowable shareholders.” Among “allowable” shareholders are individuals and certain trusts. Note that an S corp’s shareholders cannot consist of partnerships, corporations or non-resident alien shareholders. Finally, it is important to note that some corporations, such as domestic international sales corporations and certain financial institutions, cannot qualify for a Subchapter S status.
Seek legal assistance
If you have made the decision to start a business, you should speak with an Oklahoma Certified Public Accountant as well as an Oklahoma attorney who has experience in business formation. An attorney can recommend the right entity based on your business objectives.