ASK THE EXPERTS - (excerpt from Gannett Poughkeepise Journal Sunday Paper) Dec 7, 2003 Stick to plan for company structure Question: What are the differences between a limited liability company and an S corporation? Answer: One of the many decisions to be made when forming a business is to choose an organizational form. The choice involves selecting from five options: The sole proprietorship, the partnership (general, limited or limited liability partnership), the S corporation, the C corporation, and the limited liability company (LLC). Avoiding personal liability is a major concern for most entrepreneurs. Although no business structure provides absolute immunity from liabilities, both the corporation and the limited liability company generally limits the investor’s liability to the amount invested. The S corporation is formed by making a special Internal Revenue Service election. When properly made, this election allows the flow-through taxation treatment similar to that which a partnership enjoys. That means the profits or losses flow directly through and are reported on the individual shareholders tax returns. The LLC is a new hybrid form that combines characteristics of both the corporate and the partnership structure. It’s a separate entity like a corporation and therefore carries liability protection for its members but is taxed like a partnership, which also has the benefit of flow through taxation as in the S corporation. Generally both types of entities do not pay tax at the entity level. Members are taxed Members of an LLC are generally subject to self-employment tax on their entire share of the entity’s income, if the owner materially participates in its operations. When the entity will conduct an active trade of business, the S corporation may be preferable, due to the potential saving in self-employment tax. An entity that will hold real estate is often better suited to the LLC form of organization. This is due to the more favorable treatment of noncash distributions and the possibility of deductions of losses in excess of member’s initial capital contribution when qualified financing is secured by real estate. The ownership structure of LLCs is much more flexible than S corporations. There are many more restrictions as to type of owners, number of owners and special allocations of income, gain or loss with a S corporation. All in all, the choice of entity depends on many different aspects of current and future business plans. Once made, it may not be easily changed. Consulting your accountant and attorney is advised. Deborah Bailey-Browne is head of the accounting firm of Deborah Bailey-Browne CPA & Associates in Wappingers Falls.