LLCs & S-Corps

Shareholder versus Memberships

There are differences between a Shareholder of a corporation and a member of a Limited Liability Company (LLC) that are often overlooked.

Traditionally, business owners who chose to form an entity to protect personal assets but allow income/losses to be reported on a personal tax return had to create an S Corporation . Today, this is accomplished with an LLC. All 50 states and District of Columbia recognize LLC 's, and their popularity has soared.

Both S Corporations and LLC' s allow owners to avoid " double taxation " and to pay income taxes on a flow-through basis like sole proprietors and partners. Here are some key examples of the benefits of an LLC verses an S Corporation:

•  An LLC is simpler and faster to form. It may be formed in one step, while an S Corporation election can only be made after a General Corporation is formed first.

•  An LLC is not required to hold annual meetings or to keep formal minutes, while an S Corporation is required to do so.

•  LLC members can split profits/losses in any way they choose. In an S Corporation, shareholders must receive dividends according to the number of shares that they own, regardless of the amount of effort put into the business.

•  An LLC can be owned by any combination of individuals or business entities. Only United States citizens and resident aliens may own an S Corporation. Other entities generally may not own an S Corporation.

•  Most states allow single-member LLC's, however Massachusetts requires two members.

•  Enticing or compensating employees with stock options or stock bonuses requires forming a corporation since LLC's do not issue stock.

•  S Corporation shareholders pay Medicare and Social Security tax only on money received as wages or salary, but not on profits received as dividends or that stay within the company. Under certain conditions, LLC members may need to pay Social Security and Medicare taxes on the entire amount of LLC profits.

How many shareholders or members are necessary for maximum protection? There is only one thing for sure; two is better than one and three is better than two are. It sounds coy, but the reasoning is this; the law attempts not to punish those who are not responsible. Some states have statutes the minimum number of members or shareholders. If there are three people and one has not performed or caused a debt, it is more likely to be overlooks upon the other two. Liability flows through, but it flows through responsibility or “duty.” This is an important concept in limited liability. The perfect number is dependant on the situation at hand.