LLC vs S-Corp | What Entrepreneurs Need to Know in Hawaii

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LLC vs S-Corp in Hawaii

When starting a small business in the Hawaii, one of the most important decisions you’ll make is choosing the right legal structure. Two popular options for small businesses are electing for S Corporation (S-Corp) or forming an LLC in Hawaii. Both offer certain advantages and drawbacks, making it crucial to understand their differences and determine the best fit for your business. 

If you want to know more about LLC vs. S-Corporation, which is better and suitable for the business you will form, you should consider a few things. Before we get through this article, you should understand LLC vs. S-Corporation in Hawaii. 

Webinarcare Editorial Team will help you define and understand the difference, and you must be guided by all the factors gathered in this article.

LLC Vs. S-Corporation in Hawaii

LLC vs. S-Corporation: Definition

A limited liability company is a type of business structure that guards against the impact of business liabilities on your personal assets. However, while not a typical business structure, the S Corp is a tax status you can register with the IRS. Unlike an LLC, an S-Corp does not offer personal asset protection. The two are explained in detail here:

What is an LLC in Hawaii?

A legal corporate organization that protects personal assets is a limited liability company (LLC). With this setup, the LLC member or owner can protect their personal assets if their company faces financial difficulties or becomes the subject of legal action. In some unique circumstances, the opposing party may pursue your personal assets if your firm is sued in court. When you are held personally accountable for the company’s debt, this is called “piercing the corporate veil.”

By creating an LLC in your state, you can take advantage of the pass-through tax benefit, which means that your personal income will be used to determine your income tax obligations rather than the revenue generated by your firm. 

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What is an S-Corp in Hawaii?

Unlike a limited liability company (LLC) or other business structures, Hawaii S-Corporation is not a type of corporate entity. It’s a tax classification that, though in various ways for corporations and LLCs, might lead to considerable financial savings. S-Corporations are similar to LLCs, except that the Internal Revenue Service recognizes them as corporations for taxation purposes. 

A well-known alternative to the LLC is the S-corp. In contrast to a traditional C-corp, an S-corp is better suited for small and medium-sized firms, such as those with 100 total stockholders. 

LLC Vs. S-Corporation in Hawaii

Creating a business in Hawaii requires careful consideration, especially when deciding whether a state LLC or an S-Corporation is more advantageous. An LLC is a legal corporate structure, but an S-Corporation is a tax categorization which some small firms are eligible for. Forming Hawaii Corporations and LLCs can elect S-Corporation taxation by filing paperwork with the Internal Revenue Service (IRS). Making an S-Corporation may be less formal than establishing an LLC, and it typically offers less security. Additionally, S-Corporation in Hawaii does not offer the same safeguards that business owners seek in an LLC. When starting a business, thinking about your alternatives from a legal and tax perspective is important.

It is suggested that you speak with a legal professional before you begin setting up an LLC. They’ll understand what’s best for you and your company. To safeguard your personal assets from business debts, you can always start an LLC in Hawaii.

– WEBINARCARE EDITORIAL TEAM

Tax Difference Between LLC and S-Corp in Hawaii

There is a distinction between an LLC and an S-Corporation regarding taxation. Based on the differences in Federal and State taxes, you can determine whether S-Corporation or LLC in Hawaii is best for your business.

Federal Taxes 

There are a few federal tax factors to consider when selecting whether to operate an LLC or S-Corporation in Hawaii. Tax differs in terms of Pass-Through Taxes and Self-Employment Taxes.

  • Pass-Through Taxes: LLC and S-Corporation in Hawaii are the same regarding pass-through taxation at the federal level. LLCs and S-Corporations do not pay federal income taxes as separate legal entities because of pass-through taxation. Only their owners must pay federal income taxes on their portions of the business income. The company does not pay twice the tax in this kind of taxation. Unlike LLCs and S-Corporations, C-Corporations in Hawaii are mandated to have double taxation. It means that they must pay federal taxes at the entity level.
  • Self-Employment Taxes: Most LLC owners choose S-corporation taxation in Hawaii to reduce their self-employment taxes. This is because if you own an S-corporation, you are not required to be self-employed. Instead, you can join the company as an employee and receive regular salary benefits. On the other hand, an LLC member must include their guaranteed payments and a portion of the LLC’s earnings in calculating their self-employment tax. Distribution of shares defines S-Corporation shareholders in terms of their corporate incomes. 

Consider the following scenario: you are the sole owner of an LLC in Hawaii with a $200,000 annual profit. And $150,000 is a fair wage in your area for someone doing the same job as you. Under the default LLC taxation, you must pay self-employment taxes on the entire $200,000 profit. However, if your business is taxed as a state S-corp, you must only pay payroll taxes on the standard wage of $150,000. The remaining $50,000 will still be subject to income tax.

Hawaii State Taxes

At the state level, there aren’t any significant tax differences between regular LLCs and S Corporation LLCs. In terms of the annual LLC fee in Hawaii, it costs $12.50, which can be paid to the ID Secretary of State. Of course, before forming the whole LLC, you must pay the initial fee of $5 to the Hawaii Secretary of State.

LLC Vs. S-Corp Ownership Comparison

LLCs and S-Corporations in Hawaii have different ownership requirements that can impact your choice of business structure. Here’s a comparison of the key ownership requirements for each structure:

1. Number of Owners

Hawaii LLC: An LLC can have any number of owners, called members, from starting Hawaii Single Member LLC to multiple members LLC. There is no upper limit on the number of members an LLC can have.

Hawaii S-Corporation: An S-Corporation is limited to a maximum of 100 shareholders (owners). This restriction can be a limiting factor for businesses that plan to have many owners or seek outside investment.

2. Type of Owners

Hawaii LLC: An LLC can have various owner types, including individuals, corporations, other LLCs, trusts, and estates. Non-resident aliens can also be members of an LLC, like forming a Foreign LLC in Hawaii.

Hawaii S-Corporation: S-Corporations have more restrictive ownership requirements. Only U.S. citizens and resident aliens can be shareholders of an S-Corporation. Additionally, other corporations, LLCs, and certain types of trusts and estates are not eligible to be S-Corporation shareholders.

3. Classes of Ownership

Hawaii LLC: An LLC offers flexibility regarding ownership classes. Members can have varying levels of management rights, profit distribution rights, and voting rights, creating different classes of membership interests.

Hawaii S-Corporation: S-Corporations are limited to only one class of stock. While shareholders’ voting rights may differ, all shareholders must have equal rights to profit distribution and liquidation proceeds.

4. Profit Distribution

Hawaii LLC: Profit distribution in an LLC is flexible, allowing members to allocate profits and losses in any proportion they choose. This can be outlined in the Hawaii Operating Agreement.

Hawaii S-Corporation: Profits and losses in an S-Corporation must be distributed to shareholders based on the percentage of shares each owns. This can be less flexible than the profit distribution options available to an LLC.

Hawaii LLC offers more flexibility in ownership requirements, allowing for a greater variety of owner types, multiple classes of membership interests, and flexible profit distribution. In contrast, an S-Corporation has more restrictive ownership requirements, limiting the number and type of shareholders, allowing only one class of stock, and requiring proportional profit distribution based on share ownership. Consider these differences when deciding which business structure best fits your needs and goals.

Which is easier to incorporate in Hawaii: LLC or S-Corp?

Filing an LLC or S-Corporation in Hawaii requires planning and time. Even though it is not as simple as it appears, something manageable keeps it from being too difficult. LLC and S-Corporations can be formed using Resident Agent. To establish an LLC in Hawaii, you must submit the Articles of Organization to the Hawaii Department of Commerce and Consumer Affairs. Your Articles of Organization must include information about your Hawaii LLC, as well as payment of the associated filing fee.

Furthermore, you must submit additional papers to make the Hawaii S-Corporation election. Fill out Form 8832 to notify the Internal Revenue Service that you prefer to tax your LLC as a corporation rather than a partnership. Then you’ll submit Form 2553 to select S-Corporation status.

Remember that you must file annual tax returns and reports after forming your LLC to remain legally compliant.

Who Pays More Taxes in Hawaii: LLC or S-Corp?

Taxes for LLCs and S-Corporations in Hawaii depend on the tax purposes and the profit generated. LLCs are typically taxed at personal rates, and LLC owners can be treated as separate companies with their own federal tax identification numbers. You can check the Hawaii LLC Cost for detailed information.

Hawaii S-Corporation owners, on the other hand, must be paid a salary that includes Social Security and Medicare taxes. On the other hand, the owner can receive dividend income or some of the leftover profits without being classified as an employee and thus will not be subject to Social Security and Medicare taxes on that money.

Should I Incorporate Hawaii LLC as an S-Corporation?

Forming an LLC may be advantageous because your business assets are separate from your personal assets if you are a sole proprietor. You are not restricted from converting your LLC to an S-Corporation. Although an S-corporation must have a board of directors, a maximum of 100 shareholders, and follow more regulations, it is ideal for larger companies with more shareholders.

How do you convert LLC to S-Corporation in Hawaii?

You must submit Form 2553, Election by a Small Business Corporation, to the IRS to elect S-corp taxes if you want to form an LLC as an S-Corporation in Hawaii. A Form 2553 must be submitted by 75 days following the creation of your S-Corp or by 75 days following the start of the tax year in which the election is to be effective. 

You must also submit Form 8832, Entity Classification Election if your LLS-Corp has passed the deadline of 75 days and you wish to elect to be taxed as a corporation. You would collectively transmit Forms 2553 and 8832 via certified mail from the USPS. You can send your Form 2553 to the Department of the Treasury Internal Revenue Service Center – Ogden, UT 84201 Fax: 855-214-7520​ in Hawaii.

FAQs

What is an LLC?
An LLC is a legal entity that combines the flexibility and tax benefits of a partnership with the limited liability of a corporation in Hawaii.
What is an S-corp?
An S-corp is a corporation that has elected to pass through its income, losses, deductions, and credits through its shareholders for tax purposes in Hawaii.
Which one is better for my business, LLC or S-corp?
It depends on the specific needs of your business in Hawaii. Both LLCs and S-corps offer different legal, tax, and liability benefits, so you should seek professional advice to decide which entity is right for you.
How do I form an LLC in Hawaii?
To form an LLC in Hawaii, you must file Articles of Organization with the Hawaii Secretary of State and pay the associated fees.
What are the fees associated with forming an LLC in Hawaii?
The fees for forming an LLC in Hawaii can vary, but the filing fee is a minimum of $50.
What are the advantages of forming an LLC in Hawaii?
The advantages of forming an LLC in Hawaii include flexibility in management and taxation, limited liability protection, and easy formation.
What are the disadvantages of forming an LLC in Hawaii?
The disadvantages of forming an LLC in Hawaii include increased paperwork obligations and potentially higher taxation than other business structures.
How do I form an S-corp in Hawaii?
To form an S-corp in Hawaii, you must first form a regular corporation and then file an election for S-corp status with the IRS and Hawaii’s Department of Taxation.
What are the fees associated with forming an S-corp in Hawaii?
The fees for forming an S-corp in Hawaii can vary, but the filing fee for a regular corporation is $50.
What are the advantages of forming an S-corp in Hawaii?
The advantages of forming an S-corp in Hawaii include limited liability protection, certain tax benefits, and the possibility of raising capital through stock sales.
What are the disadvantages of forming an S-corp in Hawaii?
The disadvantages of forming an S-corp in Hawaii may include more extensive government oversight and increased operational expenses than other business structures.
As a single-member LLC in Hawaii, what is my tax situation?
As a single-member LLC in Hawaii, you are classified as a disregarded entity for tax purposes and must report your profits and losses on your personal income tax return.
Can an LLC in Hawaii be taxed as an S-corp?
Yes, an LLC in Hawaii can elect to be taxed as an S-corp by filing Form 8832 with the IRS and Form N-35 with the Hawaii Department of Taxation.
Can an S-corp in Hawaii be a non-profit organization?
No, an S-corp in Hawaii cannot be a non-profit organization. Non-profit organizations do not issue stock.
Can I change my business structure from an LLC to an S-corp in Hawaii?
Yes, you can change your business structure from an LLC to an S-corp in Hawaii by filing the proper election forms with the IRS and Hawaii’s Department of Taxation.
Can an S-corp in Hawaii have more than 100 shareholders?
No, an S-corp in Hawaii cannot have more than 100 shareholders in Hawaii.
Can an LLC in Hawaii convert to an S-corp without changing the Articles of Organization?
No, to convert an LLC in Hawaii to an S-corp, you must first form a corporation and then file the necessary election forms with the IRS and Hawaii’s Department of Taxation.
What happens if a shareholder dies in an S-corp in Hawaii?
If a shareholder dies in an S-corp in Hawaii, their shares pass to their beneficiaries according to their will or intestacy laws, which could potentially create issues with establishing the 100-shareholder limit for S-corps.
Can an S-corp in Hawaii have different classes of stock?
No, an S-corp in Hawaii cannot have different classes of stock. All stock must have the same rights and privileges.
Can an LLC in Hawaii have foreign shareholders?
Yes, an LLC in Hawaii can have foreign ownership, but there may be additional paperwork and compliance requirements to take into consideration.
Can an S-corp in Hawaii have foreign shareholders?
Yes, an S-corp in Hawaii can have foreign shareholders, but there may be additional compliance requirements to take into consideration.
How is ownership of an LLC in Hawaii calculated?
Ownership of an LLC in Hawaii is based on the percentage of total ownership interest held by each member.
How is ownership of an S-corp in Hawaii calculated?
Ownership of an S-corp in Hawaii is based on the number of shares owned by each shareholder.
What is the process for transferring ownership of an LLC in Hawaii?
The process for transferring ownership of an LLC in Hawaii may vary depending on the LLC operating agreement in place and if the transfer involves partial or complete ownership.
What is the process for transferring ownership of an S-corp in Hawaii?
The process for transferring ownership of an S-corp in Hawaii may vary depending on the corporation’s bylaws and the type of shares being transferred.
How are management and decision-making handled in an LLC in Hawaii?
Management and decision-making in an LLC in Hawaii are generally structured based on what is outlined in the operating agreement.
How are management and decision-making handled in an S-corp in Hawaii?
Management and decision-making in an S-corp in Hawaii are typically structured based on what is outlined in the corporation’s bylaws.
What are the annual fees for an LLC in Hawaii?
The annual fee for an LLC in Hawaii is $15.
What are the annual fees for an S-corp in Hawaii?
The annual fee for a corporation in Hawaii is $15.
What’s the main difference between LLCs and S-Corps in Hawaii?
LLCs are hybrid business entities that offer the tax benefits of partnerships and the liability protection of corporations, while S-Corps are a specific type of corporation that enjoys limited liability and avoids double taxation.
Are LLCs popular in Hawaii?
Yes, LLCs are a very popular business entity type in Hawaii because they offer relatively simple formation and management procedures, flexible tax and management structures, and a limited liability shield for members.
Are S-Corps allowed in Hawaii?
Yes, Hawaii recognizes and allows S-Corps under state law.
Which type of entity is better for a small business in Hawaii, LLC or S-Corp?
The answer to this question depends on a variety of factors such as the type of business, number of owners, liability concerns, and tax objectives. Consult with a local attorney or accountant to determine which entity type is right for your situation.
Can a non-resident own an LLC in Hawaii?
Yes, non-residents are allowed to own and operate an LLC in Hawaii as long as they register the LLC with the state, appoint a registered agent and comply with state laws and regulations.
Can a foreign corporation own an LLC in Hawaii?
Yes, foreign corporations may own an LLC in Hawaii, but they must first register the foreign corporation with the Hawaii Department of Commerce and Consumer Affairs.
What’s the process for forming an LLC in Hawaii?
To form an LLC in Hawaii, owners must file articles of organization with the Department of Commerce and Consumer Affairs and publish an announcement of the formation in a local newspaper. Owners must also appoint a registered agent, obtain the necessary licenses and permits, and comply with any additional state and federal regulations.
What’s the cost to form an LLC in Hawaii?
The cost for filing articles of organization for an LLC in Hawaii is $50.
What taxes do LLCs pay in Hawaii?
LLCs in Hawaii are generally treated as pass-through entities for tax purposes, meaning that the income and losses of the LLC are pass through to the members. LLCs are not subject to Hawaii corporate income tax or franchise tax, but Hawaii levies a general excise tax on all business income, including that earned by LLCs.
What’s the liability protection for LLCs in Hawaii?
As in other states, LLCs in Hawaii limit liability for their members to their investment in the company, protecting assets outside of the business from claims and lawsuits brought against the company.
What’s the process for forming an S-Corp in Hawaii?
To form an S-Corp in Hawaii, business owners must organize the corporation under state law, file for federal income tax treatment, and obtain the necessary permits and licenses to operate. Hawaii S-Corps also require paying a franchise tax.
What’s the cost to form an S-Corp in Hawaii?
The cost for forming an S-Corp in Hawaii is typically higher than that of forming an LLC due to ceremony filings required by NE-Newspaper publishing. Additionally, you are taxed in #Transit and #USE tax in each county (4th highest in the nation)
How many shareholders can an S-Corp have in Hawaii?
S-Corps in Hawaii can have up to 100 shareholders. Spouses and family members are counted as one shareholder.
What are the tax obligations for S-Corps in Hawaii?
S-Corps in Hawaii are pass-through entities for tax purposes, meaning that income and losses flow through to the shareholders. Members of S-Corps must file their share of company income and losses on their personal tax returns but are not subject to Hawaii corporate income tax. Instead, members must pay an annual franchise tax.
Which is cheaper to operate, LLC or S-Corp in Hawaii?
Generally, LLCs may be cheaper to operate than S-Corps in Hawaii, especially if there’s a single shareholder. This is largely due to the fact that Hawaii imposes both individual and corporate income taxes on S-Corps, while requiring only minimum taxation on an LLC.
How does the state of Hawaii tax S-Corps?
Besides state excise and general excise tax (1.5 % Oahu, 0.5% other islands) in Hawaii, S-Corps treated as partnership entities. Income generated from the S corporation is passed through to shareholders on their personal returns rather than being subject to state income tax.
Are S-Corps required to hold annual meetings in Hawaii?
Hawaii state law doesn’t require S-Corps to hold an annual meeting but does require the minutes of meetings on a regular basis (director meetings, APR meetings, Resolutions/Votes)
Do regular corporations pay franchise tax in Hawaii?
Yes, corporations with traditional C-Corp status are subject to Hawaii’s franchise tax, which is based on the company’s assets and Hawaii taxable income.
How do the owners of LLCs in Hawaii pay taxes?
Members of Hawaii LLCs pay taxes on company profits on their personal tax returns, according to the percentage of ownership interest they have in the LLC.
How can someone form an LLC in Hawaii if they’re out of the country?
You can technically file for an out-of-state LLC. Otherwise, If the out of country individuals plan to create a Hawaii LLC, they must follow all rules for the particular county and submit documents electronically.
Are there any special residency requirements for Hawaii LLC owners?
No, neither state nor federal law requires Hawaii LLC owners to be residents of the state as well.
Can corporations switch over to become an LLC in Hawaii?
Yes, Hawaii law allows both traditional C corporations and S corporations to change into an LLP through the filing of appropriate documents and taxable status with the Internal Revenue Service.
If a corporation wanted to switch over to an LLP, can the name remain the same?
Unfortunately not. Corporation titles typically end in Corp, for-profit, and some other names that aren’t allowed for LLCs.
Is there a minimum requirement for shareholders who can invest in LLCs in Hawaii?
Hawaii has no specific requirements or restrictions regarding the number, residency, or age of LLC shareholders.
Can LLC owners elect to be taxed as a corporation?
Yes. While normal Hawaii LLCs are disregarded, multi-member LLCs file taxes in the form of corporate tax returns (costlier than personal filings)
Are franchisors legally allowed to operate an LLC in Hawaii?
Yes. Franchisors are permitted to own an LLC in Hawaii if separated legal from operations aspects of business franchised.
How different are Hawaii state filing obligations for multi-member LLC versus single-member LLC?
In terms of process, multi-member LLC require fewer documents to be filed than single-member LLC. However, own as a sole proprietor or too close partnership ties with another single-member LLC will under disregard involvement, pull into court flow as requirements must hold true.
Can a foreign corporation convert or evolve into a Hawaii S-Corp?
Hawaii law states that foreign corporations cannot form Corporations electing Subchapter S (S-Corp) status. But before Hawaii passed this statute, however, it was possible. If you need modified status, contact a local expert or attorney for more information.

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Conclusion

Ultimately, choosing an LLC and an S-Corp in Hawaii will depend on your business goals, management preferences, and tax considerations. It’s essential to consult with a legal or financial advisor to determine which structure is best for your business in Hawaii and help you navigate the formation process. Making an informed decision will set your business up for success and ensure you’re well-positioned for growth and profitability.

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