When choosing the type of entity for my client to establish, ease of formation and cost are at issue. In what situations would it be better for my client to establish an S-corp rather than an LLC?

I always reccommed the LLC for ease of formation. It is simple to set up, and, for tax purposes, the LLC is able to simply elect to select an S corp status. LLC is win, win type entity. Not to mention it can have great liability protection features.

LLC's are easier to establish and if the business is a service based business, then all net income is subject to self-employment tax.

If you establish an S-corp then the shareholder/employee must take "reasonable compensation" so that he contributes to FICA.

So, if you are an LLC, you will need to make quarterly estimated payments to satisfy your tax liability, while if you are an S-corp you will need to do payroll.

An LLC offers more flexibility for the owners. E.g. with an LLC, there can be for more than 100 owners (S-corp is limited to 100 shareholders); an LLC, doesnt have to worry about being taxed as a C-corp (unless it elects to), whereas an S-corp could loose its S-corp status and be taxed as a C-corp which equals double taxation.

Ultimately, an LLC offers all the benefits of an S-corp witout all the maintenance.

Hope that helps.

Attached is a matrix i created listing the tax and non tax aspects of various entities. Consider these characteristics before choosing a entity for your client. <br><br>Post edited by: steve, at: 2007/08/16 02:50