The purpose of this post is to illustrate the use of precise terminology regarding the most common legal and tax issues of small business LLCs and S corporations. It is not meant to be comprehensive but rather to clearly state issues that we hear raised most frequently.
LEGAL/ORGANIZATION – A Limited Liability Company (LLC) is a state-authorized form of business organization that has one or more members who are deemed owners.
LEGAL/LIABILITY – Despite the name, an LLC might not limit your financial or legal liability, especially for one member LLCs where the member is active in running the business. (It might be significant to note that business lawyers may not be able to cite a specific case reference in your state where the existence of the LLC resulted in a lower total dollar of liability claim settlement of the member than if the LLC did not exist).
LEGAL/OPERATION – State or federal law may require an LLC with more than one member to be represented by an attorney in a court of law.
TAXATION AS DISREGARD ENTITTY- An LLC is not taxed under federal or state law. In itself, the LLC has no meaning or implication for federal or state tax law.
TAXATION OPTIONS FOR AN LLC WITH ONE MEMBER – An LLC with one member could be taxed as a sole proprietorship or, if properly elected, as an S corporation.
TAXATION OPTIONS FOR AN LLC WITH MORE THAN ONE MEMBER – An LLC with more than one member could be taxed as a partnership or, if properly elected, as an S corporation. In New Jersey, an LLC with more than one member may elect to be taxed as a business entity under provisions referred to as “BAIT”.
FEES AND FILING REQUIREMENTS – In most states there is a fee to establish an LLC. Most states also require an annual filing with an annual fee payment to maintain the existence of the LLC. Pennsylvania does not require most LLCs to file an annual report or pay an annual fee.
LEGAL/OWNERSHIP – An S corporation is a form of corporation organized under state law that has taken an additional deliberate step to elect to be not taxed as a corporation. In other words, an S corporation is a corporation that is not taxed like a normal corporation. An S corporation has one or more shareholders who are deemed owners. In addition to shareholders, an S corporation typically also has officers.
LEGAL/LIABILITY – An S corporation shareholder typically has strictly limited liability except if that person is also active as an officer, director, employee or other role. Liability can arise from those other roles separately from liability than that of corporate shareholder.
LEGAL/OPERATION – State and federal law typically requires an S corporation to be represented by a licensed attorney in legal matter. A shareholder/officer may not be able to represent the S corporation in a court of law.
TAXATION – S corporations are generally not subject to federal or state taxation. Federal and state tax systems have provisions specifically meant for S corporations that define the details in the way that taxation falls to the shareholders. In New Jersey, an S corporation may elect to be taxed under provisions referred to as “BAIT”.
FEES AND FILING REQUIREMENTS – In most states there is a fee to establish an S corporation and an annual filing with an annual fee payment to maintain the existence of the S corporation.