If I am about to register a small online tutoring business and am not sure whether it should be registered as S corp or LLC, which woud you suggest and why?

The business would be small and I would have several teachers working for me. They would receive an hourly rate and taxes would not be taken out from my end. What are the benefits of Scorp and LLC? Why would one be better than the other?

Asked on July 12, 2012 under Business Law, Florida

Answers:

Cameron Norris, Esq. / Law Office of Gary W. Norris

Answered 8 years ago | Contributor

Generally LLC's are a better choice for a small business owner like yourself.  The trouble with an S corp is that there are more corporate formalities to follow (i.e. annual shareholders meeting).  The LLC is simpler. 

There are also fewer restrictions on profit-sharing within an LLC as members distribute profits as they see fit. Members might contribute different proportions of capital and sweat-equity. Consequently, it's up to them to decide who has earned what percentage of the profits or losses.

But LLCs are not the perfect entity for all businesses. First, an LLC has a limited life: when a member dies or undergoes bankruptcy the LLC is dissolved. Typically, you would determine in advance the length of the LLC's duration when you file it with your state. If your plans include taking your company public or issuing shares to your employees, essentially prolonging its life, then you would need to convert to a corporate business structure.

Second, the owner of an LLC is considered to be self-employed and must pay the 15.3% self-employment tax contributions towards Medicare and social security. As such, the entire net income of the LLC is subject to this tax. It costs money to have some operational ease!  The owner of an S-Corp only has to pay the self-employment tax contributions on the profit distributed to them.

Many states, like CA have a gross receipts tax that is applicable to some business entities and not others.  This can also effect which entity you choose.


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