Is an LLC better than an S-corp?

I’m setting up a data analytics consulting business. Starting alone but hope to add former colleagues from the agency where I previously worked.

Asked on March 13, 2017 under Business Law, New York

Answers:

SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 3 years ago | Contributor

In terms of asset or liability protection, and also tax treatment, there is no difference between an LLC (if you elect partnership, not corporate, tax treatment) and an S-corp. An LLC is generally more flexible, since ownership interest does not need to be related to economic investment as tightly as with a corporation (in a corporation, it's all about how many share sof stock you own, whether the company grants them to you or your buy them): you can give any person any interest you like in an LLC, as the controlling (initially sole) member ("member" is the term for an LLC's owner[s]). You can also differentiate profit participation from ownership: with a corporation, if someone owns 10%, they get 10% of any profits or distributions; but an LLC operating agreement could give a 10% owner more or less of the profit, depending on what is agreed to. You can even differentiate profit vs. loss participation: if one person invests money, but does less work, you can let the people who do more work get more of the profit (as compensation for their work), but let the "money guy" take advantage of any losses for tax purposes. The additional flexibility of an LLC, plus the lesser "reporting" and other paperwork formalities involved, generally make it the superior choice.

SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 3 years ago | Contributor

In terms of asset or liability protection, and also tax treatment, there is no difference between an LLC (if you elect partnership, not corporate, tax treatment) and an S-corp. An LLC is generally more flexible, since ownership interest does not need to be related to economic investment as tightly as with a corporation (in a corporation, it's all about how many share sof stock you own, whether the company grants them to you or your buy them): you can give any person any interest you like in an LLC, as the controlling (initially sole) member ("member" is the term for an LLC's owner[s]). You can also differentiate profit participation from ownership: with a corporation, if someone owns 10%, they get 10% of any profits or distributions; but an LLC operating agreement could give a 10% owner more or less of the profit, depending on what is agreed to. You can even differentiate profit vs. loss participation: if one person invests money, but does less work, you can let the people who do more work get more of the profit (as compensation for their work), but let the "money guy" take advantage of any losses for tax purposes. The additional flexibility of an LLC, plus the lesser "reporting" and other paperwork formalities involved, generally make it the superior choice.


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