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Corporations
and limited liability companies ("LLCs")
are preferred business structures because,
unlike sole proprietorships and partnerships,
both offer liability protection. This means
that the owner of a company cannot be held
personally responsible for the company's
debts. The personal assets of an owner are
shielded from company liabilities. |
S Corps
and LLCs are similar in that they are both
"pass-through" entities for tax purposes;
the income of these companies are passed through to
their owners and reported on the owners' personal
income tax returns, thereby eliminating the double
taxation incurred by owners of a standard corporation,
or C corporation. (With a C corporation, the net
business income is subject to corporate income tax,
and the monies remaining after the corporate income
tax are taxed a second time when they are distributed
as dividends to its owners who must then pay personal
income tax.)
Here
is a comparison of their differences.
Filing
Fee.
One
big difference in Guam, is the filing fee. The cost
for filing Corporate Papers is now $175.00. For no
good reason, the cost for filing LLC papers is
$1000.00.
Business
Ownership & Operation - Flexibility of Management
There are restrictions on who can be owners (called
"shareholders") of an S Corporation. An S
Corp
-
can
have no more than 100 shareholders.
-
None
of the shareholders can be nonresident aliens.
And
-
shareholders
cannot be other corporations or LLCs.
An
S Corp is operated in the same way as a traditional C
corp. An S Corp must follow the same formalities and
record keeping procedures. The directors or officers
of an S Corp manage the company. And an S Corp has no
flexibility in how profits are split up amongst its
owners. The profits must be distributed according to
the ratio of stock ownership, even if the owners may
otherwise feel it is more equitable to distribute the
profits differently.
LLCs
offer greater flexibility in ownership and ease of
operation. There are no restrictions on the ownership
of an LLC. An LLC is simpler to operate because it is
not subject to the formalities by which S Corps must
abide. An LLC can be member-managed, meaning that the
owners run the company; or it can be manager-managed,
with responsibility delegated to managers who may or
may not be owners in the LLC.
And
the owners of an LLC can distribute profits in the
manner they see fit.
Employment
Tax: Savings vs. Paperwork
A major factor that differentiates an S Corp from an
LLC is the employment tax that is paid on earnings.
The owner of an LLC is considered to be self-employed
and, as such, must pay a "self-employment
tax" of 15.3% which goes toward Social Security
and Medicare. The entire net income of the business is
subject to self-employment tax. You should
consult a tax advisor to determine whether this
factor affects your business.
In
an S Corp, only the salary paid to the employee-owner
is subject to employment tax. The remaining income
that is paid as a distribution is not subject to
employment tax under IRS rules. Therefore, there is
the potential to realize substantial employment tax
savings. You
should consult a tax advisor to determine
whether this factor affects your business.
There
is no one right form for every business. We will meet
with you and help you select the correct form for your
business.
