FORTUNE Small Business:

The difference between an S-corp and LLC

An aspiring entrepreneur wonders which structure would better benefit his business.

Subscribe to Top Stories
google my aol my msn my yahoo! netvibes
Paste this link into your favorite RSS desktop reader
See all CNNMoney.com RSS FEEDS (close)

pen_and_paper.03.jpg
Ask FSB
Get small-business intelligence from the experts. Here's a chance for YOU to ask your pressing small-business questions, and FSB editors will help you get answers from the appropriate experts.
Your name:
* Your e-mail address:
* Your city:
* Your state:
* Your daytime phone #:
* Your questions:

(FORTUNE Small Business) -- Dear FSB: My friends and I often dream up ideas for small businesses. One question we can never seem to answer is whether we should incorporate as an LLC or an S-corp. What are the real differences between these two incorporation types? Are there tax benefits we should be aware of, or common pitfalls?

-Michael Bassik, Washington, D.C.

Dear Michael: A limited liability company (LLC) and an S corporation (S-corp) are completely different things, says David Sokolow, a distinguished senior lecturer at the University of Texas School of Law.

"An S-Corp is a misnomer; it's not a form of business," he says.

Rather, it's a tax status. S-corp refers to Subchapter S of the IRS code, which says that if a corporation can meet all the requirements, it can be taxed in the same way as a partnership.

"Traditionally, a partnership form gave you pass-through taxation, i.e., the opportunity to not be taxed twice, which is what you wanted," Sokolow says. "Partnerships don't pay separate income tax, so they're only taxed once. Today, you can achieve the same sort of thing with an LLC."

Both LLCs and companies with S-corp status provide owners with limited liability protection. S-corp status "just says that if you jump through certain hoops, you'll be taxed the same way a partnership is," says Sokolow. There are restrictions: for example, you can't have more than 100 shareholders.

However, if you're an LLC, "there are no hoops to jump through," Sokolow says. "You can choose how you want to be taxed. You just say 'I want to be taxed as a partnership."

That way, you enjoy the tax benefits without all the regulations involved in S-corps. The biggest pitfall may be thinking you need S-corp status when, in fact, you can get all the benefits you're looking for from an LLC.

"S-Corp regulations are very detailed and very complicated," says Sokolow. "You don't want to deal with them if you don't have to. That's why the LLC is the form of choice today. Most people starting a small business are going to form an LLC." To top of page

Did you opt for an LLC? Tell us what you recommend.
Photo Galleries
Here are the 20 most ticketed cars in America The racy Subaru WRX tops the list, but some of the other ticket magnets will surprise you. More
Lamborghini to unveil 910 horsepower plug-in hybrid The Lamborghini Asterion concept car will have a V10 engine and three electric motors. More
The weapons of The Walking Dead Zombies are fiction, but the weapons on The Walking Dead are real. More
Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.
Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.