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LLC vs. S Corporation: Which is Better?
By TherapyNotes, LLC on June 6, 2018
Looking to start a private practice or grow your existing one? You may want to form a limited liability corporation (LLC) or S corporation.
The biggest advantage these business structures have over sole proprietorships is that they allow you to protect your personal assets from business losses and debts. C corporations allow this as well, but are more suited for big businesses because they permit unlimited stockholders, cost more to set up, and may face double taxation. This makes LLCs and S corporations typically better for therapy practices, but choosing between them can be tough. Let us help.
Here are some things you should know when choosing between an LLC and S corporation.
What are LLCs and S corporations?
Before we compare the differences between LLCs and S corporations, let’s look at their definitions.
According to the IRS overview on LLCs, an LLC is “a business structure allowed by state statute.” Since states may differ on regulations, it’s important to check with your state to see if you qualify. But most states don’t restrict membership by entity type or ownership size.
S corporations are foundationally different.
These corporations “elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes,” according to the IRS overview on S corporations. The shareholders report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. That makes them responsible for certain built-in gains and tax on passive income at the entity level.
Both business structures allow you to deduct pre-tax expenses and avoid double taxation.
Differences between LLCs and S corporations
A major difference between the two business structures is taxes.
LLC owners must pay a self-employment tax and report all income and expenses from the business on a personal income tax return. Because of this, you must keep your LLC separate from personal affairs or you could lose your liability protection.
S corporation owners, on the other hand, will be taxed as an employee of the company. You’re required to pay yourself a “reasonable” salary (comparable to industry norms), deduct payroll expenses, and receive dividends from profits the company earns. This leads to many tax benefits, but comes with legal requirements and responsibilities (like conducting initial and annual shareholders meetings).
Management structure also varies between LLCs and S corporations. For LLCs, you can choose to have owners or designated managers run the daily business affairs of the LLC. For S corporations, you’re required to have corporate officers who manage day-to-day business operations and a board of directors who oversee management and make major business decisions.
Some other differences between LLCs and S corporations include:
Number of owners: unlimited for LLCs; no more than 100 for S corporations
Owner types: individuals and corporate entities for LLCs; individuals and certain trusts and estates for S corporations
Owner locations: domestic and foreign for LLCs; domestic only for S corporations
Which is better?
What’s best for your practice depends on your capabilities and goals.
In general, though, S corporations may be better if you want your practice to go public or you plan to seek outside financing, according to attorney Barbara Weltman on the U.S. Small Business Administration (SBA) website. Otherwise, LLCs tend to be easier to set up and comply with business laws. You could even form an LLC and elect for it to be taxed like an S corporation, which gives you the management flexibility of an LLC without the self-employment tax.
Whichever business structure you go with, you can always switch later (though it may be difficult and could cost you). We just advise hiring a CPA over setting it up yourself to make sure it's done right.
For more information on LLCs and S corporations, visit the Business Structures page on the IRS website.
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* The content of this post is intended to serve as general advice and information. It is not to be taken as legal advice and may not account for all rules and regulations in every jurisdiction. For legal advice, please contact an attorney.