Business owners in Alaska have various options when it comes to structuring their businesses, with two of the most common choices being limited liability companies (LLCs) and S corporations (S-corps). Both offer liability protection for the business owners, but they have some significant differences. In this article, let us dive deeper into the advantages and disadvantages of LLCs and S-corps in Alaska.
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What is an LLC?
An LLC is a business structure that combines the liability protection of a corporation with the simplicity of a partnership. LLCs have a flexible management structure that allows the members to choose between being managed by all the owners (member-managed) or by one or more managers they appoint (manager-managed). An LLC's income is only taxed once in the form of personal income tax for the owners, who are called members. LLCs provide limited liability so that members' personal assets are protected from legal liabilities of the business.
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What is an S-Corp?
An S-corp is a corporation that chooses to be taxed as a pass-through entity similar to an LLC's governance structure. Owners, in this case, are referred to as shareholders and elect a board of directors to oversee company-wide decisions. S-corps have limited liability, with personal assets protected from business legal liabilities. The income of the corporation passes through to the shareholders, and they are responsible for reporting income and other relevant financial records.
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Advantages of an LLC
1. Flexible taxation options - LLCs can elect to be taxed as a partnership, a disregarded entity or as an S-corporation so that profits can be taxed as personal income and avoid double taxation.
2. Simplicity in Recordkeeping - LLCs have a relaxed recordkeeping requirement and are suitable for small businesses.
3. Limited liability - LLC owners' assets cannot be seized due to the company's legal liabilities, providing them with personal protection that a sole proprietorship or partnership does not provide.
Advantages of an S-Corp
1. Pass-through taxation - S-corps are taxed as an individual, and income is not taxed twice, making it easier for business owners to avoid paying corporate tax.
2. Shareholders can get a salary – Shareholders who actively participate in the company’s affairs will have incomes subject to self-employment tax. Shareholder taxes are split into the company's base salary and any additional profits that are distributed as dividends.
3. Limited individual liability - S-corps provide its shareholders with limited financial protection in cases of legal action against company liabilities.
Disadvantages of the LLC
1. Filing fees can be costly - Starting an LLC involves filling necessary government documentation so businesses may also have some state-level licensing fees along with entity state formation registration.
2. Advertising costs - An LLC is restricted when it comes to garnering investors due to securities laws.
3. Tax returns per year - An LLC requires tax reporting every year, even when there are no taxes to be paid and file an annual report or face dissolving or ending them.
Disadvantages of S-Corp
1. Higher operational and incorporation fees - The expenses associated and fees in creating an S-corp tend to be higher than that of LLC formation.
2. Strict eligibility criteria – In Alaska, appointing “managed associates” conflicts with S-corporation qualification standards for proprietors and how income is divided.
3. Limited Ownership Connections — Complex shareholding restrictions will hinder aspiring investors from buying outright controlling ownership.
Conclusion
Deciding what business entity type is appropriate depends on multiple factors. When making a determination based on fast structures and servicing small businesses, promoting shared liability to stakeholders, the LLC is the ideal choice. For tax stratagem choices that provide split gains and lowering individual payment insurance, an S-corporation should be pursued. Always discuss options with an expert for guidelines that enable investments or real applicable corporations to operate securely and soundly, based under state laws where operation takes place.
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