You’ve finally decided to start a business of your own. Or maybe you have been running one as a sole proprietor, even moonlighting on the side, and have decided you need to protect your personal assets from those involved with your growing business. You might even decide there could be a tax break in it for you. Whatever your reasoning, you’re likely contemplating a choice that many entrepreneurs face: should your enterprise be structured as a limited liability corporation, often called an LLC, or an S corporation, known commonly as an S corp, which is named after subsection S of Chapter 1 of the Internal Revenue Code? These two organizational forms have similarities and differences—which can make choosing between them and others, like a C corporation (which includes publicly-held companies), confusing at best. Each state might also have different rules that come into play. That’s why you’ll want to get some input from a respected accountant and/or attorney to help you decide what might be the best fit for your business.
Defining the Benefits
A major advantage of organizing your business as an LLC or an S corp is that you can protect your personal assets from the creditors of your business. “Limited liability means you can’t be financially responsible for more than your investment in the company,” writes Greg McFarlane in his book, Control Your Cash: Making Money Make Sense. “If you put in $10,000, and incur $11,000 in debt, you’re only potentially liable for $10,000. Your creditors (check that, your LLC’s creditors) can’t ‘pierce the corporate veil,’ as the phrase goes.”
Another common aspect of LLCs and S corps is that they help you avoid paying both personal and corporate taxes. The difference is that in an S corp, owners pay themselves salaries plus receive dividends from any additional profits the corporation may earn, while an LLC is a “pass-through entity,” which means that all the income and expenses from the business get reported on the LLC operator’s personal income tax return, says Ebong Eka, a CPA who also pens his own blog about the world of entrepreneurship at MoneyMentoringMinutes.com.
Both LLCs and S corps can also deduct pre-tax expenses, such as travel, uniforms, computers, phone bills, advertising, promotion, gifts, car expenses, and health car premiums.
source www. inc.com