Mergers & Acquisitions Advisory

A Neumann & Associates, LLC

April 21, 2016

LLC or S-Corp: which is the best structure for a business?

By Achim Neumann

While many business owners get started without paying heed to corporate structuring, they will eventually get to a point where protecting their assets from tax authorities and litigators will become important.
Of all the ways to structure a company, the LLC and S-Corp are two methods that entrepreneurs have been using to organize their business assets.

Which of these corporate structures are right for owners? It depends on their priorities; below, we will break down scenarios in which either an LLC or an S-Corp makes sense.

Logo_of_the_Internal_Revenue_Service.svg_
An LLC is the best structure for a business if…

1) Simplicity is a priority

Successful business owners are busy: they don’t have a lot of time to burn, so minimizing its usage on administrative tasks is a top priority.

The process by which an LLC is organized is simplistic, as its application form takes up a single page, guidelines are straightforward, and the owner doesn’t need to file a separate return for it, as they only need to report income on their personal income tax return.

2) Cash reserves are limited

Another distinct advantage of an LLC is that the application fee for setting one up is very inexpensive.  In most jurisdictions, you will only need to part with a couple hundred dollars for the privilege of applying for this business structure.

In the early stages of a start up, every dollar counts, so minimizing the amount of capital allocated to unproductive but necessary expenses is vital.

3) Some shareholders are not American citizens

An inescapable fact of business in the 21st century is that more companies have not just employees, but stakeholders that reside outside of the United States of America.

While other corporate structures place restrictions on ownership on non-American citizens, an LLC allows those without US citizenship to own a stake in a company which it is organized around.

An S-Corp is the best structure for a business if…

1) Shareholders wish to receive dividends from excess profits

A key benefit of an S-Corp is that it allows the business owner to pay out dividends from profits after necessary expenses have been addressed.

By paying stakeholders a “reasonable” salary (as defined by the regulation of an S-Corp), any profits that are left over can be distributed in the form of dividends, which offer a lower overall tax burden than what is assessed on straight salary.

If there is a reasonable expectation of a consistent annual profit, this can be a great way to minimize the tax bill of an owner and their partners.

2) Cultivating an image of integrity is paramount

As advantageous as organizing a company under an LLC can be,  its reputation often suffers due to bad actors in the business community.

If a business owner operates in an industry where reputation is a very important quality to maintain, an S-Corp can be a better organizing structure, as it has many rules and regulations to follow, and requires its owners to adopt official titles and responsibilities.

Directors need to be appointed to attach accountability for major decisions that are made with regards to company business, while officers are similarly appointed to handle day-to-day business operations.

3) The owner wants to pay less in self-employment tax

While LLC’s are simple and inexpensive to set up,  they are subject to the quarterly self-employment tax that the IRS charges them, which can equate to a heftier tax bill for some companies.

Because an S-Corp structure allows owners to treat themselves as employees, the overall tax burden at the end of the day can be less due to the ability of S-Corp stakeholders be privy to unearned income (dividends).

Disclaimer – This post was not prepared by a certified accountant and just serves to present basic, publicly available information. Consult your tax professional before making any decisions.

About A Neumann & Associates, LLC

A Neumann & Associates, LLC is a professional mergers & acquisitions and business brokerage firm having assisted business owners and buyers in the business valuation and business transfer process through its affiliations for the past 30 years. With an A+ Better Business Bureau rating, the company has senior trusted professionals with a deep knowledge based in multiple field offices along the East Coast and has performed hundreds of business valuations in its history. The firm’s competitive transaction fees are based on successfully completing transactions. For more information, please contact A Neumann & Associates at 732-872-6777 or info@neumannassociates.com

Comments are closed.

Any questions? Please contact us at 732-872-6777
Call Now

Client Testimonials

“I recently contacted A. Neumann and Associates about getting a valuation of my business done. I spoke with Marc, who explained the process in detail. After meeting with Marc in order to get a clear understanding of my business, and what I was hoping to accomplish. His patience in answering all my questions and his knowledge of the proper way to market my business gave me great confidence that this is the firm I will be using to sell my business for max value. Working with Marc at A Neumann & Associates was very easy and professional. I did not know all that was going to be involved in selling my business but they helped me through the process. What I thought was going to be a just another one of those pushy sales companies was just the opposite. Polite, knowledgeable, and a pleasure to talk to and deal with. I highly recommend this firm to anybody who wants to sell now or down the road. Marc not only knows his stuff, but actually is a real nice guy.”

Double Diamond

“Used A Neumann & Associates to sale my business. could not imagine having done it with out the patience and experience Gary provided. Thanks Gary,”

Dennis Frazier

“Working with Marc and his company was a pleasure. What I thought was going to be a just another one of those pushy sales companies was just the opposite. Polite, knowledgeable, and a pleasure to talk to and deal with. Marc handled most of the interaction and he has one of the greatest demeanors. Again, it was a pleasure working with him and his firm.”

Douglas DiCeglio

“I recently completed an acquisition using A Neumann & Associates. Tony Valentino was very helpful and accessible during the entire process. They do a thorough job vetting both parties and got us to the finish line.”

Srini Mudambi

“Claus out of Florida helped us with the sale of our business. We had never done anything like this and him and his team walked us through the process from start to finish. We had some challenges through the process and Claus continued to show up even in the difficult conversations.”

Colby Harris, Co-Owner, Del Mar Designs

“Claus Madsen thoroughly helped us with selling our company. From the 1st introductory meeting explaining to us what was possible, to providing us with resources to assist with the sale. Claus was invaluable throughout the whole sales process. Claus was with us every step of the journey and always made himself available for any questions or issues that came up along the way. If you are interested in selling your business, I encourage you to reach out to Claus and the ANA team so that they can let you know what’s achievable. These guys will make it happen!”

Ron Harris, Co-Owner and Vice President, Del Mar Designs

“A Neumann & Associates is the only business broker I would use or consult with. They have assisted with 3 business sales over the past 15 years with me. They are honest and sincere and have always performed better than my expectations. They are the only one i would use for the sales of my businesses.”

James Belanger, Business Owner

“I wanted to take a second to commend the exemplary customer service from both you [Karin Neumann] and Mr. Valentino. It’s both a rarity in the industry, and very much appreciated.”

Andrew G., Investor

“We worked with Neumann & Associates to investigate the purchase of a research company in 2010 and found Achim to be capable, forthright and realistic. His depth of experience enabled us to fully understand our options, offering creative options that might enable the acquisition. While we didn’t acquire that particular company at that time, we know exactly who to call whenever we’re looking to buy or sell a business.”

Daniel Coates, Buyer

“Purchasing a business through this firm was a pleasure. Gary was very professional and transparent throughout the entire process. I look forward to working with A Neumann & Associates in the future.”

William Klemens, Buyer
view all testimonials

Contact A Neumann & Associates, LLC

If you are considering selling your business, please contact us to learn more about our comprehensive service spectrum. Our experienced professionals will answer all your questions about selling a privately held business in complete confidentiality. Please fill out our contact form, or call us at 732-872-6777. We will contact you directly and will never identify ourselves to your employees.

call us now
Contact Us for a Free, Confidential Consultation

Experienced M&A Advisors available

Full Name
Email Address
Phone Number
Message