Are there significantly more/less tax implications between an LLC and S-Corp?

UPDATED: Aug 24, 2012

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Are there significantly more/less tax implications between an LLC and S-Corp?

Asked on August 24, 2012 under Business Law, California


SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 10 years ago | Contributor

In terms of taxes, there is almost nothing to chose between a S-corp and a limited liability company for which you select "partnership" or "disregarded" status--both are pass-through entities, which means that the profit and losses are attributed the owners' tax returns, and there is (for tax purposes) no separate entity to be taxed.

An LLC offers additional flexibility, if you have partners, in terms of allocating profit and loss--they can be allocated in different proportions and separately from each partners' ownership interest. For example: say you have a partner who put in sweat equity and another who has put in cash but does not work. The "working" partner can control the LLC and have 51% of the ownership, but the "investing partner" can be given, say, 75% of the profit until such time as his investment is paid back, at which point it goes 50 - 50. In a corporation, profit and loss will strictly reflect the percentage of shares owned.

On the other hand, it's easier to give someone a small piece of a S-corp if you want to incentivize or reward an employee--just give him or her some of your shares. There is no need to restructure the operating agreement, as you would with an LLC.

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