LLC vs. S-Corporation: Comparing the Best Business Structure for Telehealth Practices
Both our current and would-be members ask us quite frequently about the best business structure for telehealth. Here we explore the definitions, advantages, differences and best choice to decide on your business structure for your telehealth practice.
1. Definitions: What are LLCs and S-Corporations?
According to the IRS, an LLC is “a business structure allowed by state statute” where ownership stakes are given to members. “Members may include individuals, corporations, other LLCs and foreign entities. There is no maximum number of members. Most states also permit “single-member” LLCs, those having only one owner.” LLCs can be classified in a variety of ways for tax purposes according to the elections of the members themselves.
S corporations on the other hand are very different as far as federal tax purposes, and can “elect to pass corporate income, losses, deductions, and credits through to their shareholders” according to the IRS. The shareholders report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. That makes them responsible for certain built-in gains and tax on passive income at the entity level.
2. Advantages of LLCs and S-Corporations
The biggest advantage these business structures have over sole proprietorships is that they allow you to protect your personal assets from business losses and debts. Both business structures allow you to deduct pre-tax expenses and avoid double taxation.
3. Differences between LLCs and S-Corporations
A major difference between the two business structures is taxes.
LLC owners must pay a self-employment tax and report all income and expenses from the business on a personal income tax return. Because of this, you must keep your LLC separate from personal affairs or you could lose your liability protection.
S-Corporation owners, on the other hand, will be taxed as an employee of the company. You’re required to pay yourself a “reasonable” salary (comparable to industry norms), deduct payroll expenses, and receive dividends from profits the company earns. This leads to many tax benefits, but comes with legal requirements and responsibilities (i.e. initial and annual shareholders meetings).
Management structure also varies between LLCs and S corporations. For LLCs, you can choose to have owners or designated managers run the daily business affairs of the LLC. For S-Corporations, you’re required to have corporate officers who manage day-to-day business operations and a board of directors who oversee management and make major business decisions. However, you can be the sole shareholder, the Chief Executive Officer and the Chairman of the Board for your S-Corporation which is quite common and where those documents are made and kept internally by you (we can help you with this once you have signed up to start your Virtual Practice).
Some other differences between LLCs and S corporations include:
- Owner types: individuals and corporate entities for LLCs; individuals and certain trusts and estates for S corporations
- Number of owners: unlimited for LLCs; no more than 100 for S corporations
- Owner locations: domestic and foreign for LLCs; domestic only for S corporations
4. Which is better?
We’ve found that generally speaking, S-Corporations are less expensive, less paperwork intensive and easier to setup than Limited Liability Companies.
However, you could even form an LLC and elect for it to be taxed like an S corporation, which gives you the management flexibility of an LLC without the self-employment tax.
Keep in mind that regardless which setup you go with, you can always switch later by filing new paperwork which is relatively easy to do.
*We are not accountants or lawyers and the content of this post is for educational purposes only. The information contained herein should not be taken as accounting or legal advice and we strongly advise you to connect with your own tax professional before starting your business.