7 Reasons to Become an LLC Instead of an S-Corporation

By Gene Marks

When you’re forming a new business, you’ve got a lot of choices on how to structure it. The most popular is the sole proprietorship, which entails using the Schedule C form on your personal tax return to report profits.

But a sole proprietorship doesn’t protect your assets and has other drawbacks. That’s why many small businesses consider forming S corporations (S corps) and Limited Liability Companies (LLCs). Both of these structures allow earnings to be “passed through” to your personal tax return.

However, I always recommend forming an LLC over an S corp. Here are seven reasons to choose an LLC for your business structure.

1. LLCs Are Taxed the Same as S-corps

When you form an LLC, you’ll have the choice of being taxed just like any other “pass-through” business, including:

  • S-corps
  • Partnerships
  • Sole proprietorships

Assuming you choose an LLC, you’ll likely file the IRS Form 1065-Partnerships. Your profits will not be taxed at the company level and instead will “pass through” to your individual return. You will likely be able to take advantage of the Section 199A Qualified Business Income Deduction, which means that as much as 20% of your company’s income may not be subject to taxes.

2. LLCs Are Flexible and Less Expensive to Operate

S-corps are subject to corporate rules because they’re corporations. This means that if you form an S-corp you will need to have a formal set of bylaws. You will also need a board of directors that will be required to regularly meet and produce written minutes. You don’t need these things with an LLC.

Instead, you’re only required to have an “operating agreement,” which can be as flexible as you need it to be.

3. You Can Have Unlimited Owners With an LLC

An S-corp can only have up to 100 shareholders, and they must be U.S. citizens or residents. An LLC can have as many “members” as you’d like and there’s no restrictions on nationality.

An LLC can be owned by other S-corps, C Corporations, LLCs, business partnerships, or sole proprietorships, but an S-corp cannot.

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