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

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LLC vs S-Corp in Montana

When starting a small business in the Montana, 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 Montana. 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 Montana. 

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 Montana

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 Montana?

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 Montana?

Unlike a limited liability company (LLC) or other business structures, Montana 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 Montana

Creating a business in Montana 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 Montana 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 Montana 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 Montana.

– WEBINARCARE EDITORIAL TEAM

Tax Difference Between LLC and S-Corp in Montana

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 Montana 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 Montana. Tax differs in terms of Pass-Through Taxes and Self-Employment Taxes.

  • Pass-Through Taxes: LLC and S-Corporation in Montana 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 Montana 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 Montana 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 Montana 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.

Montana 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 Montana, it costs $20, which can be paid to the NE Secretary of State. Of course, before forming the whole LLC, you must pay the initial fee of $70 to the Montana Secretary of State.

LLC Vs. S-Corp Ownership Comparison

LLCs and S-Corporations in Montana 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

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

Montana 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

Montana 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 Montana.

Montana 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

Montana 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.

Montana 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

Montana 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 Montana Operating Agreement.

Montana 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.

Montana 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 Montana: LLC or S-Corp?

Filing an LLC or S-Corporation in Montana 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 Registered Agent. To establish an LLC in Montana, you must submit the Articles of Organization to the Montana Secretary of State. Your Articles of Organization must include information about your Montana LLC, as well as payment of the associated filing fee.

Furthermore, you must submit additional papers to make the Montana 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 Montana: LLC or S-Corp?

Taxes for LLCs and S-Corporations in Montana 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 Montana LLC Cost for detailed information.

Montana 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 Montana 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 Montana?

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 Montana. 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 Montana.

FAQs

What is an LLC in Montana?
In Montana, an LLC (Limited Liability Company) is a type of business structure that provides protection for personal assets and limits your personal liability for the business’s debts and lawsuits.
What is an S-corp in Montana?
An S-corp is a type of business structure in Montana that is taxed like a partnership or sole proprietorship, but it offers limited liability protection like a corporation.
What are the advantages of an LLC in Montana?
The advantages of forming an LLC in Montana include limited liability protection, flexibility in management and with taxes, and fewer formal requirements than other business structures.
What are the advantages of an S-corp in Montana?
The advantages of forming an S-corp in Montana include limited liability protection, the ability to avoid double taxation, and the ease of adding or removing shareholders.
What are the disadvantages of an LLC in Montana?
The disadvantages of forming an LLC in Montana may include higher taxation and fewer tax advantages than a corporation, as well as the need to file more paperwork with the state.
What are the disadvantages of an S-corp in Montana?
The disadvantages of forming an S-corp in Montana may include restrictions on ownership and the amount of shareholders, as well as the need to file more paperwork with the state.
Can an LLC in Montana elect to be taxed as an S-corp?
Yes, an LLC in Montana can elect to be taxed as an S-corp if certain eligibility requirements are met.
What taxes do LLCs in Montana have to pay?
LLCs in Montana may be subject to federal income tax, state income, and sales taxes depending on their specific circumstances.
What taxes do S-corps in Montana have to pay?
S-corps in Montana may be subject to federal income, state income, and payroll taxes depending on their specific circumstances.
Do LLCs in Montana have annual filing requirements?
Yes, LLCs in Montana are required to file an Annual Report with the Secretary of State’s office.
Do S-corps in Montana have annual filing requirements?
Yes, S-corps in Montana are required to file an Annual Report with the Secretary of State’s office.
Can an LLC in Montana have only one member?
Yes, an LLC in Montana can have one or more members.
Can an S-corp in Montana have only one shareholder?
No, an S-corp in Montana must have at least one shareholder but does not have a limit on the maximum number of shareholders.
How much does it cost to form an LLC in Montana?
The cost to form an LLC in Montana varies depending on filing fees and other expenses, but typically it ranges from $70 to $170.
How much does it cost to form an S-corp in Montana?
The cost to form an S-corp in Montana varies depending on filing fees and other expenses, but typically it ranges from $50 to $150.
How long does it take to form an LLC in Montana?
The time it takes to form an LLC in Montana can vary depending on the business’s compliance and filing requirements, but typically it takes 2-3 weeks.
How long does it take to form an S-corp in Montana?
The time it takes to form an S-corp in Montana can vary depending on the business’s compliance and filing requirements, but typically it takes 2-3 weeks.
Can an LLC in Montana have different classes of membership?
Yes, an LLC in Montana can have multiple classes of membership that have different rights and responsibilities.
Can an S-corp in Montana have different classes of stock?
No, an S-corp in Montana can only have one class of stock.
Who manages an LLC in Montana?
An LLC in Montana can be managed by its members or a designated manager.
Who manages an S-corp in Montana?
An S-corp in Montana is managed by its Board of Directors and officers.
Can Montana EIN number apply to both LLC and S-corp?
Yes, a single EIN (Employer Identification Number) can be used for both an LLC and S-corp in Montana, provided they are registered under the same legal name and structure.
Can an LLC in Montana convert to an S-corp?
Yes, an LLC in Montana can convert to an S-corp, but certain requirements must be met, including getting approval from all members and filing appropriate forms with the state.
Can an S-corp in Montana convert to an LLC?
Yes, an S-corp in Montana can convert to an LLC, but certain requirements must be met, including getting approval from shareholders and filing appropriate forms with the state.
How do I dissolve an LLC in Montana?
An LLC in Montana can be dissolved by filing Articles of Dissolution with the Secretary of State’s office.
How do I dissolve an S-corp in Montana?
An S-corp in Montana can be dissolved by filing Articles of Dissolution with the Secretary of State’s office.
What is the minimum age to form an LLC or S-corp in Montana?
The minimum age to form an LLC or S-corp in Montana is 18 years old.
Do LLCs and S-corps in Montana need a registered agent?
Yes, both LLCs and S-corps in Montana are required to have a registered agent to receive legal and official correspondence.
What is the difference between an LLC and an S-corp in Montana?
The main difference is in their taxation and ownership structures.
Can an LLC or S-corp have multiple owners in Montana?
Yes, LLCs and S-corporations can have multiple owners, but the number of owners is limited in an S-corp.
Can an LLC or S-corp choose its tax status in Montana?
Yes, both LLCs and S-corps have the option to choose their tax status in Montana.
What are the advantages of an S-corp over an LLC in Montana?
S-corps provide certain tax advantages and protection of assets that LLCs do not have in Montana.
What are the disadvantages of an S-corp over an LLC in Montana?
The disadvantage of an S-corp is that it is more rigid in terms of management and loss allocation arrangements compared to an LLC.
What is the minimum number of members or shareholders required to form an LLC or S-corp in Montana?
In Montana, LLCs and S-corps both require at least 1 member/shareholder to be formed.
Is it necessary to file a separate tax return for an LLC or S-corp in Montana?
Yes, both LLCs and S-corps need to file a separate tax return in Montana.
Can an LLC or S-corp be taxed as a sole proprietorship/partnership in Montana?
Yes, LLCs can be taxed as sole proprietorship/partnership in Montana while S-corporations must be taxed a certain way.
What is the filing fee for forming an LLC or S-corp in Montana?
The fee to form an LLC in Montana is $70 and the fee to form an S-corp in Montana is $70.
Can an LLC or S-corporation shield personal assets from lawsuits and bankruptcy in Montana?
Yes, both LLCs and S-corporations can offer personal asset protection to owners in Montana.
What is the difference between the formation process of an LLC and an S-corp in Montana?
S-corps require more formalities and are required to follow a strict ownership structure, unlike an LLC.
Is there a limit on the number of shares an S-corp can issue in Montana?
There is no limit on the number of shares that an S-corp can issue in Montana, but shareholders are limited to 100.
Is there a requirement for a buy-sell agreement for LLCs and S-corps in Montana?
There is no specific requirement for an LLC or S-corp to have a buy-sell agreement, but many opt to have one in Montana.
What is a single-member LLC in Montana?
A single-member LLC is a type of LLC that is composed of just one member, but they are still separate legal entities eligible for taxation.
Can an LLC or S-corp offer stock or shares to investors in Montana?
Only S-corporations are allowed to offer stock to investors in Montana under the aforementioned restrictions.
Do S-corps have to pay unemployment taxes in Montana?
Yes, S-corps are required to pay unemployment taxes in Montana as per the rules and regulations.
Do LLCs have to pay unemployment taxes in Montana?
LLC owners who take a salary or wage are subject to Montana unemployment insurance but no specific rate or rule concerns LLCs as entities.
What is a written operating agreement and does an LLC need one in Montana?
It is a legal document that outlines the operating procedures, member contributions, and shares, and is highly recommended. LLCs in Montana must have a written operating agreement.
What responsibilities do LLC members have in Montana?
LLC members are responsible for investing capital, contributing to company funds and managing relationships/capital within the LLC’s guidelines.
Can I dissolve an LLC or S-corp in Montana? How?
LLCs and S-corps can be dissolved by entering the Dissolution VNP, notifying creditors, mandatory public notice in newspapers and filing the necessary forms.
What is a Sales and Use tax permit and does an LLC or S-corp need one in Montana?
A permit required by the state for taxpayers doing business in Montana selling taxable goods/services. An LLC or S-corp may need one to carry out business dealings in Montana.
How is an LLC taxed in Montana and what’s the tax rate?
Montana LLCs can opt for pass-through taxation that gets taxed at individual income tax rates –2020 does have 6 Income Brackets starting at 1% and ending at 6.9%.
How is an S-corp taxed in Montana and what’s the tax rate?
S-corps in Montana are also taxed on pass-through basis. Otherwise, the corporation files a corporate income tax return. Rates are similar to what individuals’ tax rates are.
What is the liability protection for LLCs vs S-corps in Montana?
LLCs and S-corps in Montana both have liability protection, shielding personal property of owners’/shareholders from certain – but not all – legal claims and debts of the business.
Can LLC or S-corp owners receive “penalty relief” for taxes paid in Montana?
Owners of either entity can seek penalty relief from unpaid taxes reporting changes or payments made late; get relief.
Where can I incorporate my LLC or S-corp in Montana?
For proper regulations and procedures for LLC or S-corp incorporation in Montana, visit the General Information and Service Section of the Montana government website.

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Conclusion

Ultimately, choosing an LLC and an S-Corp in Montana 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 Montana 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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