Wyoming is one of the most business friendly states in the nation. The Tax Foundation has noted that Wyoming is the state with, “the most business-friendly tax climate in the nation”. The state has remarkably low tax all round with no state tax on personal or business income. It is no surprise that Wyoming is a popular state to form businesses in and two of the most popular types of businesses to form are LLCs and S Corporations. These types of businesses both provide limited liability asset protection but they have their unique attributes which may make one preferable over the other.
Limited liability companies are protected by what is known as the corporate veil. This veil is the name given to the separation of assets which an LLC or S corporation provides. An LLC or an S corporation provides asset protection by limiting the liability of the business to the assets of the business. It is in this way that the business owners personal assets are protected from liability incurred by their company and company assets are protected from liability incurred by the owner.
The Differences Between LLCs and S Corporations
Level of Formality
LLCs and S corporations have different legal requirements which need to be met in order to be a legally compliant business. These legal requirements are more strenuous for S corporations than for LLCs. An S corporation is required to follow these guidelines when forming and operating: arrange at least a single meeting for shareholders per year during which it is required that minutes are taken, maintain financial records which are accurate, develop and abide by the bylaws of the company and issue stock to each individual who is a shareholder in the company. In normal circumstances an LLC is not required to follow these guidelines on S corporations. However, the IRS recommends that an LLC should still have and abide by an operating agreement, maintain documentation of substantial financial choices and hold an annual meeting for its members.
Business Entity or Tax Status?
While an LLC is a type of business entity an S corporation is a status for tax purposes which was created by the IRS to help small businesses. An LLC is a business entity type which is created under the law of the state in which it is formed. A unique feature of an LLC is that the members of an LLC may decide that they wished to be taxed as an S corporation.
Shareholders and Members
LLCs and S corporations are differentiated by the nature of their ownership positions and the restrictions on these positions. An S corporation has shareholders in the same way that other corporations do but this does come with certain restrictions which have been issued by the IRS. Shareholders in an S corporation may not exceed 100 and each shareholder must be able to prove that they are an American citizen. An LLC has members and there is no limit to the number of members which an LLC may have. These members may also be from different countries as they are not required to prove American citizenship. Additionally, members may be individuals or other LLCs. Members are able to decide the extent of their responsibilities and may be active in the managerial aspects of their company or be completely independent of any managerial responsibilities.
Benefits of Both LLCs and S Corporations
There are two benefits which are of particular importance to mention in the context of the comparison. These are not the only benefits of LLCs and S corporations but they are the most significant.
Personal Asset Protection
The asset protection which limited liability provides extends to both LLCs and S corporations as previously mentioned. The members of an LLC and the shareholders of an S corporation are both protected from being liable in a personal capacity for the debts of their respective businesses. This is because the business and the individual are considered two distinct entities in a legal sense. The result of this distinction is that creditors of an LLC or an S corporation are not able to expropriate the personal assets of the owners of either of these types of companies.
Pass Through Taxation
C corporations which are the more common type of corporations are subject to a form of double taxation. This occurs because the corporation is taxed on the profits which it generates and the owners are taxed on the income which they receive from the corporation. S corporations and LLCs are not subject to this double taxation because of what is known as pass through tax. This is the allowance for the profits which an LLC or S corporation generates to be passed through to the owners or shareholders. This means that the owners or shareholders will only be taxed once on the profits of their business as they only need to file a personal tax return. Their business will not need to file any income tax returns with the IRS.
LLC or S Corporation?
There is no clear cut answer to this question and the best type of business will vary depending on the owner’s needs and requirements. Typically a small business would be better suited to an LLC as this has fewer formalities and is easier to establish and maintain. Additionally, an LLC allows for more flexibility in ownership as there are fewer restrictions on who or what is allowed to be an owner. An S corporation would typically be more suited to a medium to large company which has the resources to handle the required formalities. An S corporation also allows for more flexible company ownership as it does not dissolve when an owner leaves the business like an LLC. Additionally, it is easier to transfer ownership through shares than it is for an LLC. For more information on the topic, consider this resource.
Final Thoughts
A real estate business should definitely consider establishing themselves as an LLC or an S corporation in Wyoming. The state is incredibly business friendly and has very low tax overall. An LLC or S corporation will provide a business with limited liability asset protection which is incredibly important for businesses. Additionally, these structures will allow for pass through taxation to avoid double tax. The right type of business structure for a real estate business will depend on the needs of the business as well as its resources with an LLC favoring small to medium sized businesses and an S corporation favoring medium to large companies. 10 Things to Consider Before Buying a House Next to a School
