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LLC vs. S-Corp for online marketing business

Asked by: Sherryl  — 24 December, 2010

My husband and I wish to start and online marketing business. We will be equal partners. Which is better for us, LLC or S Corporation?

Answered by: admin  — 24 December, 2010

Dear Sherryl,

LLC and S-Corporation are similar in how they are taxed – both are pass-through entities, meaning you don’t pay income tax on the entity level, only on personal level. However LLC is considered a more flexible entity, because you can elect it to be taxed as partnership, S-Corporation or C-Corporation, whatever is more suitable to your situation at any given moment.

In addition to that LLCs come with fewer formalities, meaning it is easier to maintain your entity in good standing with the state, which in turn means better asset protection. On top of that S-Corporation comes with certain restrictions (you can read here about Restrictions of S-Corporations). Most might not apply to you, but you still should know about them.

So why would people choose to form an S-Corporation and not LLC? There are few special cases which make people choose S-Corporation over LLC. For example, in some states the cost of forming an LLC is much higher than S-Corporation, with notable examples being Illinois ($513 vs. $181 in state fees) and New York, which requires all LLCs to make consecutive newspaper announcements of their formation (the cost of those publications could run to over a thousand of dollars in New York City).

Another example of why people choose S-Corporation over LLC would be the nature of their business. For example a high-tech startup aiming at becoming a public company and gearing up to seek investment capital from angel investors first and later from Venture Capital firms would probably choose to be S-Corporation, with the goal of converting it back to C-Corporation when the time is right. Those businesses do not become profitable until few years later, and therefore they are less concerned about the issue of double taxation (thats why many of them don’t even elect Subcharter status and stay regular C-Corporation).

I hope that gives you some material to base your decision on, and I would also recommend to consult with your local CPA to see what they would suggest you to do.

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