Deciding between an LLC and an S Corporation in Virginia

Choosing the Right Business Structure is Crucial

Deciding between an LLC and an S Corporation is a pivotal choice that can significantly impact your business's taxation, liability, and overall success. Understanding the nuances of each entity helps you align your decision with your long-term goals. Please note: This articles should not be considered legal or free advice. Please set up a consultation with one of our attorneys before making a final decision.

Understanding LLCs and S Corporations

Limited Liability Company (LLC): An LLC is a flexible business entity that combines the liability protection of a corporation with the tax benefits and simplicity of a partnership. Owners, known as members, are protected from personal liability for business debts and claims.

S Corporation: An S Corporation is not necessarily a type of business entity but rather better understood as a tax designation available to both corporations and LLCs. Electing S Corp tax status for your LLC for instance allows profits (and some losses) to pass directly to shareholders' personal income without being subject to corporate tax rates.

Key Differences Between LLCs and S Corporations

Taxation: While both offer pass-through taxation, S Corp election can provide tax savings on self-employment taxes. LLC members pay self-employment tax on all business income, whereas S Corp shareholders can split income between salary and distributions.
Ownership Restrictions: LLCs have no ownership restrictions, allowing unlimited members, including foreign individuals and entities. S Corps are limited to 100 shareholders, all of whom must be U.S. citizens or residents.
Operational Formalities: S Corps require more formalities, such as adopting bylaws, issuing stock, holding annual meetings, and keeping meeting minutes. LLCs have fewer mandatory requirements, offering more operational flexibility.

Why Choose One Over the Other?

Choose a Virginia LLC if:

You prefer flexibility in management and fewer formal requirements.
You want no restrictions on ownership types and classes.
You seek simplicity in profit distribution and operational structure.

Choose a Virginia S Corporation if:

You aim to reduce self-employment taxes through salary and dividend distributions.
You're willing to adhere to corporate formalities for potential tax benefits.
You have a limited number of shareholders who meet the eligibility criteria.

How to Convert an LLC to an S Corporation

Ensure Eligibility: Verify that your LLC meets the IRS requirements for S Corp status, including shareholder limits and types.
File IRS Form 2553: Submit the "Election by a Small Business Corporation" form to the IRS, signed by all shareholders.
Update Operating Agreement: Amend your LLC's operating agreement to reflect the S Corp election and adjust any provisions as needed.
Comply with State Requirements: Some states may require additional filings or notices when changing your tax status.
Adjust Payroll Practices: Begin treating owner distributions according to S Corp guidelines, including reasonable compensation for shareholder-employees.
Ultimately review your options with one of our attorneys or your CPA before taking action.

Additional Considerations

Consult a Professional: Changing your business structure has legal and tax implications. Consult with an attorney or tax advisor to navigate the process smoothly.
Ongoing Compliance: S Corps require adherence to stricter compliance standards. Be prepared to maintain corporate formalities to retain your S Corp status.
Financial Analysis: Evaluate the financial benefits versus the administrative responsibilities to ensure the switch aligns with your business objectives.

Make an Informed Decision for Your Business's Future

Understanding the distinctions between an LLC and an S Corporation empowers you to make the best choice for your business. Careful consideration and professional guidance can lead to significant tax savings and operational efficiencies.

If you would like to discuss your options in Virginia, please call one of our offices at 804-325-1245 (Richmond) or 757-941-4298 (Williamsburg) to discuss how our attorneys can be of assistance.

Special thanks to Wesley Singer for editorial assistance in drafting this article.