I am starting an LLC and don’t know how to decide between a C corporation structure or S Corporation.

I am a single member LLC and want to know how to decide what the classification
for my company should be. I will pay myself an income from the company and will
not take any company profits if any. I will not have any employees. Please advise.

Asked on June 7, 2017 under Business Law, Texas

Answers:

SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 3 years ago | Contributor

An LLC is not a corporation, and vice versa: if something is an LLC, it cannot be a C-corporation or S-corporation. Limited liability companies and corporations are separate or different legal entities.
An LLC with "pass through" or "partnership" (that is, S-corp-like) tax treatment is the best choice for you, based on what you write.
1) An LLC provides the same liability protection for your personal assets as a corporation.
2) An LLC is simpler than a corporation in terms of paperwork and formalities. You don't need to hold annual meetings and keep corporate minutes, for example.
3) Both LLCs (with partnership tax treatment) and S-corps are disregarded entities: profits and losses "pass through" the business are and are taxed as part of your personal income taxes, even if you don't actually take a distribution of money. This is better for you than a non-disregarded entity, like a C-corp, because:
a) In the early stages of a business, you tend to have more expenses than profits. If your business is a disregarded entity, this means its business losses become tax benefits for you personally, offsetting your income. A company which is showing a net loss, even if it's making more than enough money to continue operations, becomes a tax gain.
b) You say you will pay yourself an income and not take any company profits, but we can't predict the future: the time could easily come when you decide to take profits out. If you do, with a disregarded entity, the profits are only taxed once, as part of your taxes; but with a C-corp, they are taxed twice: first as corporate profits, then later as part of your own income. 
For a sole member small business, an LLC with disregarded entity tax status is almost always the right choice.

SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 3 years ago | Contributor

An LLC is not a corporation, and vice versa: if something is an LLC, it cannot be a C-corporation or S-corporation. Limited liability companies and corporations are separate or different legal entities.
An LLC with "pass through" or "partnership" (that is, S-corp-like) tax treatment is the best choice for you, based on what you write.
1) An LLC provides the same liability protection for your personal assets as a corporation.
2) An LLC is simpler than a corporation in terms of paperwork and formalities. You don't need to hold annual meetings and keep corporate minutes, for example.
3) Both LLCs (with partnership tax treatment) and S-corps are disregarded entities: profits and losses "pass through" the business are and are taxed as part of your personal income taxes, even if you don't actually take a distribution of money. This is better for you than a non-disregarded entity, like a C-corp, because:
a) In the early stages of a business, you tend to have more expenses than profits. If your business is a disregarded entity, this means its business losses become tax benefits for you personally, offsetting your income. A company which is showing a net loss, even if it's making more than enough money to continue operations, becomes a tax gain.
b) You say you will pay yourself an income and not take any company profits, but we can't predict the future: the time could easily come when you decide to take profits out. If you do, with a disregarded entity, the profits are only taxed once, as part of your taxes; but with a C-corp, they are taxed twice: first as corporate profits, then later as part of your own income. 
For a sole member small business, an LLC with disregarded entity tax status is almost always the right choice.


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