The most common decision for smaller start up companies is whether to form a LLC or corporation with a "s election". Both entities have many similarities such as limited liability protection of personal assets against lawsuits and debts. However, there are several differences, especially in regards to taxation. Although there is a lot of information regarding s-corporations and LLC's in general, there is very little available that breaks down the important differences. Below I have summarized the major characteristics and issues associated with each entity:

I. S-Corporation

A. Liability

1. Shareholders granted personal protection from debts and liabilities of business (like c-corp and LLC)

B. Taxation

1. Pass through: Profits and losses pass through the corp and reported to the individual tax return of shareholder (same as partnership and LLC)

2. Self-Employment Tax Break: Profits of the S-Corp which pass through to the shareholders are not subject to self-employment tax (Social Security and Medicare which is approximately 15%). Rather, self-employment is only taxed on the portion classified as a "reasonable salary". LLCs and sole-proprietorships must pay self-employment tax on all income. The ability to minimize self-employment tax is deemed to be one of the greatest benefits of a s-corporation.

3. Corporate Losses: losses in the corporation can be deducted from the individual tax returns of the shareholder thereby allowing them to offset other sources of income such as their W-2 income.

4. Franchise Tax: Franchise Tax is waived your first year. LLC on the other hand, must pay franchise tax its first year. S-Corp must pay the CA Franchise Tax board either a 1.5% tax on net CA income or $800, whichever is greater.

5. Distribution of Profits and Losses: No special allocation of profit and losses for shareholders. Corporate profits and losses must be split up proportionately to the percentage of shares owned by each shareholder. LLC