In this article, Turner Little highlight the similarities and differences to help you make your decision, should you acquire an S corporation, or a LLC.
Each are pass-through entities with the income/loss taxed on the individual shareholder or member’s personal return. Whether you purchase an LLC or an S Corp, you won’t be responsible for the debts or liabilities. They are also separate entities legally, so no tax is paid at business level. If there’s any tax due then that’s paid at an individual level.
Differences in taking ownership
The Internal Revenue Service restricts ownership of S Corps – they can have no more than 100 shareholders who must all be US residents. They cannot be owned by C Corporations, other S corporations, multiple member LLCs, partnerships or most trusts. Therefore, there is more freedom of ownership than with an LLC whose members may have different distribution rights and classes of ownership.
Differences in management
Owners of an LLC can choose to nominate other members to manage the LLC. LLCs run in this way will closely resemble a corporation, meaning other members won’t be involved in daily business decisions.
S corporations have both directors and officers. In many closely held businesses, the owners serve on the board of directors, overseeing corporate affairs. The owners may also be involved in daily managerial activities.
S corporations may have fewer self-employment taxes than an LLC as the owner can still be treated as an employee and therefore paid a reasonable salary. FICA and Medicare taxes are dependant on salary level. . The IRS is actively scrutinising situations where S corporation shareholders minimise their salaries and make distribution in an effort to avoid self-employment taxes.
LLC members who are actively involved in the business must pay FICA and Medicare tax on their earnings. Typical payroll withholdings are not taken out of these payments. Instead, LLC members must pay estimated taxes based on their projected tax liability.
The Medicare surtax will also apply when income exceeds certain thresholds, so S corporation owners only pay the surtax on wages outside of the income threshold. LLC members who exceed this threshold may be subject to the surtax on all income from the business.
There isn’t one rule that is guaranteed to work for you. A CPA or tax attorney can assist you in choosing your most suitable structure, but it’s important to consider the above operational, legal and tax aspects of each structure and apply them to your own situation.
Turner Little was founded in 1998 and it has since become a well-established UK based professional Company Registration Agents, Registered Bank Intermediaries and Business Consultants, as well as Trust providers.