When deciding to set up a small business many people hear that they should set up an S Corporation or an LLC (Limited Liability Corporation). Picking the right one for you can save you a lot of time and hassle down the road. Here are a few things to consider in making your choice.
S Corporation Considerations
- Pro: Amounts in excess of what would be considered a normal salary can be distributed as dividends (and taxed at a lower rate).
- Con: Strict filing guidelines, the need to create a board of directors and hold annual meetings with minutes, and all the other administrative tie-ups.
- Con: Income must be distributed based on the share % ownership, so if one partner works more and you decide they should be compensated more this can be difficult.
- Con: More costly to set up.
- Pro: Simplified tax filings, you donâ t file for the corporation only for yourself.
- Pro: Easy to set up and few regulatory requirements.
- Pro: Income distribution can be based on owner agreement, not share ownership.
- Con: Quarterly tax payments need to be made to the IRS based on earnings estimates.
- Con: Need to clearly keep personal expenses out of the corporation or risk seeing the LLC being not recognized by the IRS.
Both vehicles see you taxed on the income generated by the company as if you had earned it personally.
If you want to leave funds in the corporation a C Corporation may be recommended.