LLC vs. S-corp

Other Versions
The pros and cons of these two business classifications. June 6, 2001

My cabinet shop will be located in Virginia. I've noticed that there are a lot of LLC's popping up in my area and that many local lawyers are leaning towards LLC's.

Are there any advantages to an LLC vs. S-Corp? LLC's haven't been tested in VA courts, to my knowledge. Which is the lowest cost to set up and maintain?

Forum Responses
First, I'm no lawyer. The one that is recognized by both state and federal, limits liability best and avoids an IRS schedule 'C'. Some states don't really recognize a Sub-S. Personally, I like a full corporation but the LLC is touted as being as good. You, your accountant and your attorney can make the right choice.

I went for a sub-s. The LLC was a bit of a pain. My accountant and lawyer talked me out of an LLC, into a sub-s. There is more protection. The whole thing cost me about $500 to set up. But don't make a decision based on cost. You get what you pay for.

From the original questioner:
I think I see these differences:

LLC - no 6% VA Corp. income tax
LLC - no 2.5% VA unemployment tax
LLC - same provisions for liability protection

LLC - no stocks to set up

LLC and S-Corp both have pass-through income tax filing.

My company will be fairly small and S-Corps don't have the perks that C-Corps do, anyway. It looks like an LLC is the same as an S-Corp as far as tax filings/benefits, but with less paperwork, annual fees and taxes, and more flexibility regarding use of assets and how/whom can be a partner.

Is anyone out there right now using an LLC?

I obtained the above information from Virginia documents and guides. I haven't talked to a lawyer yet because the minimum fee is nearly cost prohibitive for consultation. CPA's not much cheaper.

If your net income (company) is less than $100,000, C corp is a lower rate.
If you want to pay for your health insurance, it's deductible in a C corp and 50% of it is income in an S.
C corps can carry losses forward.
C corps get more after tax cash in a sale.
If VA doesn't recognize S corps, you need a C corp. You will have more depreciation and assets than a law firm--talk to an accountant--you can switch from an S to a C with no penalty, but it's harder to switch from a C to a S.
None of them are really going to protect you as the owner as much as you would like.
Or you can be inventive and have parts of your business under different names, under all 3 types, and see some real tax savings.

What are your thoughts on pre-tax expenses or post-tax expenses for insurance, motor vehicles, etc? There may be no 6% corp. tax to an LLC, but I'll bet there's more to that story, like a franchise tax that goes down with volume or is the 6% on gross or net? In the states where I've owned a business, unemployment rates are established based on experience and 2.5% seems like bad experience, which a new business won't necessarily have. A conversation with an accountant and a lawyer in your state and knowledge of your situation working with your business plan will provide the info.

The comments below were added after this Forum discussion was archived as a Knowledge Base article (add your comment).

Comment from contributor A:
An LLC will provide asset protection for the owner as well as the S and C corporations. The difference is that corporate formalities are required to be observed S and C corps (it is not a bad idea to also do it with an LLC). If you are a small business you will more than likely be sued personally along with your corporation. However, if you look and act like a corporation, the Court will more than likely not let the corporate veil be pierced and let the Complaintant know that he is trying to sue the wrong entity.

An LLC is a pass-through entity so all income and deductions will be passed through to the individual taxpayer. You will pay tax at your individual rate.

And to change from a C to an S corp, you make an election by filing the appropriate forms.

LLC's are an accepted form of entity recognized in almost every state. If you feel uncomfortable that the LLC is not tested in VA courts yet, register as a Delaware LLC and register as a foreign LLC in VA. The only remedy to an LLC creditor of a Delaware is a Charging Order. A very handy tool.