LLC or Corporation?  The answer may not be as simple as you think.  Important considerations include the business’ purpose, goals and how it wants to be taxed.

There are a lot of considerations when deciding on whether to be an LLC or a S-Corp.  With the final version of the new bill; taxes aren’t one.  First, let me explain that under the new tax law; trusts, estates, individuals, S corporations and partnerships are all considered “flow through entities” and are eligible for the same 20% deduction.  It’s the rest of that new law that is complicated and will need a post a lot longer that this one to explain.

Massachusetts S-Corporations

Corporations have formalities that must be followed; such as: Adopting bylaws, issuing stock, holding initial and annual director and shareholder meetings, and keeping meeting minutes with corporate records.  Leadership of the corporation (President, Secretary, Treasurer) are all elected by the board of directors, and the board of directors is elected by the shareholders. S-Corporations also have some ownership restrictions: 1) there can be no more than 100 shareholders; 2) partnerships, LLCs, corporations and non-resident aliens may not own stock in an S-corp; and 3) only certain types of trusts can own shares of an S-Corp.

A corporation is formed by paying a filing fee of$265 and then filing an annual report every year.  The annual filing fee for a Massachusetts corporation is typically $125.

S-Corp Taxation

When it comes to corporations and taxes; I would avoid a C-corp for a most small business and startups because of double taxation.  In an S-corp. the company files a tax return but does not pay any federal taxes. (Massachusetts charges S-corporations a tax of $456). Profits are attributed to shareholders in proportion to their ownership of the corporation and are reported on K-1s that are issued every tax year.  Typically, in s-corps where the owner/shareholders are also the ones running the business, the owners can save money on self-employment and payroll taxes by taking a portion of the profit distributions on k-1 and paying themselves as a W2 employee.

 The Limited Liability Company (or LLC)   

LLC’s have an advantage in that they are easier to run.  Owners of an LLC are known as “members” and the ones who run the LLC are known as “managers.”  Managers can be members; but, don’t have to be.  The members of an LLC sign a document known as an “operating agreement” that outlines how managers are selected, what restrictions there are on transfers of ownership, and other details concerning membership and management.  There is typically no stock, and the LLC is not required to have annual shareholder meetings or keep detailed meeting minutes.  Moreover, provided that the LLC has not elected to be treated as an S-Corp (see below), an LLC can be owned by any other type of business entity, foreigners, non-resident aliens and trusts.

To form an LLC in Massachusetts, the LLC must pay a filing fee of $525 and then file an annual report every year.  The annual filing fee for an LLC is also $525.

LLC Taxation

When it comes to taxes, the LLC is by default treated as a sole proprietorship (single member) or partnership (multiple members) or it can choose to be treated as a corporation (S or C).  However, as I mentioned in the previous paragraph; there are some advantages of being treated as a s-corporation in that, the members of the LLC can pay themselves a salary; allowing the members to save some money when it comes to payroll taxes and self-employment taxes.

Conclusion

Starting a new business can be a daunting task, and while a limited liability company and S corporation share many qualities, they also have distinct differences.  If you want to avoid costly headaches and potential lawsuits down the road, the best thing to do is to schedule a free consultation with a business attorney at Grantham Law and let us help your business get started on the right foot.