A Close Look at S Corps, LLCs and Sole Proprietorships
Factors
Sole Proprietorship
LLC
S Corp
Personal liability of owners
Unlimited personal liability
Members (owners) are not responsible for the debts of the LLC. If the LCC fails, the members can lose, at most, the value of the investment in the LLC.
Shareholders are not responsible for the debts of the corporation. If the corporation fails, the shareholders can lose, at most, the value of their investment in the corporation.
Taxation
Single taxation of income to sole proprietor
“Check the box taxation”. An LLC can choose whether to be taxed as a corporation or as a partnership (pass through taxation).
There is no taxation of the S corporation itself. The earnings are passed through to the shareholders who are taxed at their individual rate on their individual tax returns.
Control or management of the business
Complete control by sole proprietor
Members enter into an operating agreement under which the division of management rights e.g., committees, voting is established.
Shareholders elect directors who set broad corporate policy. Directors appoint officers to carry out that policy, aided by employees.
Continuity of business
Ends at death of sole proprietor
Depends upon state statute creating LLCs. Some states allow perpetual existence.
S corporations may continue as long as the business qualifies under the Federal Tax Code and the rules and regulations of the IRS.
Raising capital
Dependent upon assets and credit of sole proprietor
In addition to the capital contributions paid in my members, the LLC can borrow money as a separate entity.
S corporation may issues securities such as stocks and bonds, and/or borrow money based upon the corporation’s credit.
Complexity of setup and maintenance of business form
No government permission required, few (if any) legal costs
In some states a single individual may form an LLC. Ohio allows this. To form the LLC, article of organization must be filed with the state. Members also need an operating agreement. There are minimal filing fees.
S corporation are created by the state. Incorporators must submit articles of incorporation and pay appropriate fees to the state. In addition, the S corporation must elect this tax status with the IRS.