MediaTech Law

Startup Structure Question: Why and when are LLCs preferable to S corps and vice versa?

Answer #1: If now or soon contemplating employee stock options and/or bringing in outside investors, then corporation status is probably desirable.  And … you can later convert from S to C.

Answer #2: Otherwise, LLCs are more desirable.

Pass-Through Entities

Both S corps and LLCs are pass-through entities, meaning that income will not be taxable at the company level, but only taxable to the owners.  This distinguishes these 2 entity types from traditional “C” corporations, which must pay taxes both at the company level and later when distributed to the shareholders.

Tax Advantage – S Corps

S corps have one – potential – further tax advantage over LLCs, in the ability to effectively reduce an owner’s self-employment taxes by paying the owner a salary versus dividends.  So, for example, assuming two companies, one an S corp, the other an LLC, both earn $100,000 in income.  The S corp could pay the owner $50,000 in salary, and the $50,000 balance would be deemed dividend income to the owners or owners, and not subject to self-employment taxes.  The salary portion is subject to self-employment taxes, while the dividend portion is not.

Using the same figures for an LLC, the full $100,000 would be deemed income to the owner subject to self-employment tax.