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Adding to your bottom line: Will you make more with an LLC or an S Corp?

Your business has grown to the point where you need to start focusing on where to take it from here, especially when it comes to finding the best entity to use for classifying your company.

If you don’t want to assume the position of personal liability and responsibilities to your business, then a sole proprietorship is clearly not an option.

However, you might be having a little difficulty deciding whether to establish an LLC or S Corp.

There are several points you should consider for this decision-making process to make it easier to complete. Learn how to start an LLC in simpler steps from Money Brighter

Think about the Shareholders

When selecting the perfect business entity between LLC vs. S Corp, you need to take your shareholders into consideration. In regard to who can qualify as an official shareholder, an S Corporation has more restrictions in general than an LLC. For example, the maximum number of shareholders you can have is 100. While this limit might be more than enough for the average small business, it is clearly not enough for a major corporation. You also have to think about the geographic location of your shareholders, because non-U.S. citizens are disqualified based on the regulations and guidelines of an S corporation, according to the Small Business Administration.

Consider the Allocation of Income

When making this decision, you also need to consider how the income generated throughout the year will be allocated accordingly. Within an LLC, your loss and generated income are disproportionately allocated among the actual owners of the company. With an S corporation, on the other hand, these factors are assigned to individual shareholders based on their ownership shares, which have already been prorated.

This can become a major problem if you want to base your profit allocation on the amount of work performed. For instance, splitting the profits 50/50 between two owners is a requirement if they established the S corporation together, regardless of how much work one owner may do in comparison to the other. If you are looking to split the profits and income based on your workload, however, then you should choose LLC when considering LLC vs. S corp entities instead.

The Handling of Acquired Losses

When choosing sides between whether to go with an LLC or an S corporation, you also need to consider how all of your company’s losses will be handled efficiently at the end of the year. Regardless of which entity you select, shareholders and registered members will be able to pass their losses through, along with their personal income reporting. The type of business you have can play a significant role in making this decision based on this particular benefit, according to Yahoo.

For example, there are some businesses (such as real estate investment brokers) that are able to pass more of their losses to personal income reports as an LLC instead of an S corporation. As long as your company focuses primarily on real estate investments, according to Mashable.com, establishing an LLC will allow you to write off a higher amount of your losses than an S corporation.

Don’t Forget about Taxes

One of the key areas that you should never forget about, regardless of which side you take in the LLC vs. S corp debate, is taxes. You will be required to acquire the liability of all taxes that are owned on the profits your company generates throughout the year.

It doesn’t matter whether the profits were reinvested back into your business or used to pay your wages. Therefore, if you want to focus on reinvesting a substantial amount of your profits back into your business, then you should think about establishing a C corporation instead.

photo credit: photosteve101 via photopin cc