Scorp vs LLC. What should a business owner opt for?
There are many forms of business entities that exist in the law for various purposes. A layman might think why does the form of the business matter? Turns out that is one of the biggest factors. One such frequent structure is Scorp and LLC. Let us see who wins the fight between Scorp vs LLC.

First, it is important to understand when you need Scorp or LLC. Contrary to the perception, Scorp is the mode in which an entity opts to tax itself. A business does not need to form Scorp, while they need to form LLC separately in the eyes of the law.

As your company grows, your tax rate grows too. Growing companies face a variety of complexities during tax season, and that’s why when your company grows, you may want to consider forming an S Corporation, otherwise known as an S Corp. The S Corp is a business entity that offers significant tax advantages while still preserving your ownership flexibility.

An Scorp,
Also known as the sub-chapter or small business corporation, is a tax code that was enacted into law by Congress in 1958. The S Corp was created to encourage and support the creation of small and family businesses while eliminating the double taxation that conventional corporations were subjected to.

A Ccorp
A Ccorp is a business term that is used to distinguish this entity from others, as its profits are taxed separately from its owners under subchapter C of the Internal Revenue Code. In an S corporation, the profits are passed on to the shareholders and are taxed based on personal returns. Companies do this under subchapter S of the Internal Revenue Code.

Another type of corporation is C-corp
Shareholders own the C-corp, who elect a board of directors that make business decisions and oversee policies. In most cases, a C corporation is required to report its financial operations to the state attorney general. Because a corporation is an independent entity, a C corporation does not cease to exist when its owners or shareholders change or die.

Major Benefits of a C Corporation
As opposed to a sole proprietor or an LLC, corporations are usually at a lower risk of being audited by the government.
The owners and the shareholders of a C corporation have limited liability towards business debts.
A C-corp can deduct the cost of benefit as a business expense. For example, they can write off the entire costs of health plans established for employees as business expenses. These benefits are tax-free even for those receiving them.
Companies can use a C-corp to split the corporate profit amongst the owners and the corporation. This can result in overall tax savings. The tax rate for a corporation is usually less than that for an individual, especially for the first $50,000 of taxable income.
A Limited Liability Company, also known as an LLC, is a type of business structure that combines traits of both a sole proprietorship and a corporation. An LLC is eligible for the pass-through taxation feature of a partnership or sole proprietorship, while at the same time limiting the liability of the owners, similar to a corporation.

As we do not consider LLC as a separate entity, the company does not pay taxes or take on losses. Instead, owners do this as they have to report the business profits, or losses, on their personal income tax returns. However, just like corporations, members of an LLC are protected from personal liabilities, thus the name Limited Liability.

Scorp vs LLC – A Comparison
Basis Scorp LLC
Formation Requirements, Costs Must file with the state, state-specific filing fee required Must file with the state, state-specific filing fee required
Personal Liability Shareholders are not typically held liable Members are not typically held liable
Administrative Requirements Election of the board of
directors/officers, annual meetings, and annual report filing requirements

Relatively few requirements
Management Shareholders elect directors who manage business activities Members can set up a structure as they choose
Term Perpetual: can extend past death or withdrawal of shareholders Perpetual, unless the state requires a fixed amount of time
Taxation No tax at the entity level. Income passed through to the shareholders. No tax at the entity level. Income passed through members
Double Taxation No No
Transferability of Interest Yes, but must observe IRS regulations on who can own stock Possibly, depending on restrictions outlined in the operating agreement
Capital Raising Shares of stock are sold
to raise capital.

Limitations prevent Scorp stock ownership by corporations

May sell interests but subject to the operating agreement
Ease of Operation Must have annual meetings, Board of Directors meetings, corporate minutes, and stockholder meetings Easy, some states may require more than others