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S Corporation

The S Corporation is a corporation who has elected to be taxed as a "pass-through" entity (as if the owners were sole proprietors or partners). All corporate profits and stock dividends are reported by the owners as personal income. This type of structure blends the tax advantages of a sole proprietorship or partnership with the limited liability and prestige of a corporation. Many small businesses elect this status. To be eligible for this status:

All shareholders must be citizens or permanent residents of the United States

The number of shareholders may not exceed 100

Only one class of stock may be issued

No more than 25% of gross corporate income may be derived from passive income

If held by a small business trust, the beneficiaries of the trust must be individuals, estates or charitable organizations.

Banking institutions, insurance companies taxed under Subchapter L and certain affiliated corporation groups are ineligible.

An S Corporation is a special form of corporation (Note: The "S" in S Corporation refers to subchapter S of the tax code). S Corporations are based on C Corporations but they are not treated as a separate tax entity as C Corporations are.

Instead, the income of an S Corporation is "passed through" to the personal income of its owners (shareholders) in proportion to their ownership interest. An S Corporation is created by forming a traditional C Corporation first, and then filing the IRS Form 2553 (The Subchapter S Election) for federal recognition of S Corporation tax status. While the S Corporation has many of the same features as a C Corporation, there are some important differences.

Note: While the S Corporation features similar pass through taxation to an LLC, in the area of self-employment taxes an S Corporation can have an advantage over an LLC. The compensation (salary and bonuses) of S Corporation shareholders is subject to self-employment tax, but not on the profits automatically allocated to them as a shareholder. This can be an advanced and aggressive tax strategy, so be sure to consult with the appropriate tax and legal specialists before pursuing it.

S-Corp Advantages

Limited Personal Liability
Perpetual Existence
Better Fringe Benefits
Pass-Through Taxation

S-Corp Disadvantages

More extensive record keeping requirements
Restrictions on number and type of allowable shareholders
Additional Restrictions

LLC (Limited Liability Company)

One of the premier advantages to setting up your own LLC is that the process of establishing an LLC is not as complicated and strict than if one was to establish a corporation. Moreover, the owners do not have to give up the limited liability protection granted to corporate owners. In other words, LLC owners are similarly protected from being personally liable for most losses and debts of the business itself. With BCG's help, your LLC will help you build credibility!

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LLCs also use the same type of pass-through taxation used by partnerships, which is an advantage for many smaller businesses.

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LLCs also provide you more flexibility in terms of how the business is controlled and managed. There are not as many formalities as there are for corporations, and you have many more options about how each LLC owner is involved (whether they are simply an investor or have management control).

You also have more flexibility with financial aspects of the business. For example, while corporate laws provide strict rules and regulations on how corporate profits and losses are distributed, LLCs are generally freer in determining how they want to make such distributions.