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

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LLC vs S-Corp in Rhode Island

When starting a small business in the Rhode Island, 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 Rhode Island. 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 Rhode Island. 

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 Rhode Island

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 Rhode Island?

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 Rhode Island?

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

Creating a business in Rhode Island 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 Rhode Island 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 Rhode Island 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 Rhode Island.

– WEBINARCARE EDITORIAL TEAM

Tax Difference Between LLC and S-Corp in Rhode Island

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

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

Rhode Island 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 Rhode Island, it costs $50, which can be paid to the SC Secretary of State. Of course, before forming the whole LLC, you must pay the initial fee of $150 (by mail and online) to the Rhode Island Secretary of State.

LLC Vs. S-Corp Ownership Comparison

LLCs and S-Corporations in Rhode Island 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

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

Rhode Island 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

Rhode Island 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 Rhode Island.

Rhode Island 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

Rhode Island 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.

Rhode Island 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

Rhode Island 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 Rhode Island Operating Agreement.

Rhode Island 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.

Rhode Island 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 Rhode Island: LLC or S-Corp?

Filing an LLC or S-Corporation in Rhode Island 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 Rhode Island, you must submit the Articles of Organization to the Rhode Island Department of State. Your Articles of Organization must include information about your Rhode Island LLC, as well as payment of the associated filing fee.

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

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

Rhode Island 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 Rhode Island 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 Rhode Island?

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 Rhode Island. 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 – Kansas City, MO 64999 Fax: 855-887-7734​ in Rhode Island.

FAQs

What is the difference between an LLC and an S-Corp in Rhode Island?
In Rhode Island, both an LLC and an S-Corp offer limited liability protection, but the two types of businesses are taxed differently.
Can a single member own an S-Corp in Rhode Island?
No, Rhode Island does not allow single member S-Corps.
How do I form an LLC in Rhode Island?
To form an LLC in Rhode Island, you must file Articles of Organization with the Rhode Island Secretary of State’s office and pay the appropriate fees.
What are the taxation implications of forming an LLC in Rhode Island?
In Rhode Island, LLCs are taxed as pass-through entities, meaning that the business itself does not pay taxes; rather, profits and losses are passed through to the individual members and taxed at their personal income tax rates.
What is the benefit of forming an S-Corp in Rhode Island?
One of the major benefits of forming an S-Corp in Rhode Island is that shareholders can receive limited liability protection while avoiding double taxation.
What is double taxation?
Double taxation is when a corporation pays corporate income tax on its profits, and then the shareholders pay taxes on the dividends they receive from those same earnings.
Can an LLC be taxed as an S-Corp in Rhode Island?
Yes, an LLC in Rhode Island can elect to be taxed as an S-Corp by filing Form 2553 with the IRS.
Is there a minimum number of shareholders required to form an S-Corp in Rhode Island?
Yes, there must be at least one shareholder when forming an S-Corp in Rhode Island.
Are there any residency requirements for S-Corp shareholders in Rhode Island?
No, there are no residency requirements for S-Corp shareholders in Rhode Island.
Do S-Corps have to pay the Rhode Island minimum corporate tax?
Yes, S-Corps must pay the minimum corporate tax in Rhode Island, regardless of their profit or loss.
Can an S-Corp be dissolved in Rhode Island?
Yes, an S-Corp can be dissolved voluntarily or involuntarily in Rhode Island.
What is the process for dissolving an S-Corp in Rhode Island?
To dissolve an S-Corp in Rhode Island, the shareholders must file Articles of Dissolution with the Rhode Island Secretary of State’s office and pay any outstanding fees or taxes.
Are LLCs required to have annual meetings in Rhode Island?
No, there are no annual meeting requirements for LLCs in Rhode Island.
Can an LLC convert to an S-Corp in Rhode Island?
Yes, an LLC in Rhode Island can convert to an S-Corp by filing Form 8832 with the IRS.
What type of business entity is best for a small business in Rhode Island?
The type of business entity that is best for a small business in Rhode Island depends on a variety of factors such as ownership and liability concerns, tax implications, and long-term business goals.
Is Rhode Island a good state for small businesses?
Rhode Island ranks 28th overall in the Small Business & Entrepreneurship Council’s Small Business Policy Index, indicating that the state is an average environment for small businesses.
Does Rhode Island allow for series LLCs?
Yes, Rhode Island allows for the formation of series LLCs.
Are there any franchise taxes for S-Corps in Rhode Island?
No, S-Corps in Rhode Island are not subject to any franchise taxes.
Can individual members of an LLC be held liable for the company’s debts in Rhode Island?
Generally, individual members of an LLC are not personally liable for the company’s debts in Rhode Island, but there are exceptions, such as in cases of fraud or improper conduct.
Are there any restrictions on the types of businesses that can form an S-Corp in Rhode Island?
Yes, certain types of businesses, such as banks, insurance companies, and international sales corporations, among others, are not eligible to form an S-Corp in Rhode Island.
Do S-Corps require board of directors in Rhode Island?
No, S-Corps in Rhode Island are not required to have a board of directors.
Can a foreign shareholder own an S-Corp in Rhode Island?
Yes, foreigners can own shares in an S-Corp in Rhode Island.
What kind of fees does Rhode Island charge for forming an LLC?
Rhode Island charges a $150 filing fee for Articles of Organization for LLC formation.
Can an S-Corp in Rhode Island issue bonds?
Yes, an S-Corp is generally allowed to issue bonds in Rhode Island, subject to certain Securities and Exchange Commission regulations.
Is Rhode Island a business-friendly state?
Rhode Island ranks 35th in the Tax Foundation’s 2021 State Business Tax Climate Index, indicating that the state has a relatively unfriendly business tax environment.
Can an LLC member also be an S-Corp shareholder in Rhode Island?
Yes, it is possible for an individual to be both an LLC member and an S-Corp shareholder in Rhode Island.
What is the cost of filing Annual Reports for an S-Corp in Rhode Island?
The cost of filing Annual Reports for an S-Corp in Rhode Island is $50.
What is an LLC?
An LLC is a flexible form of business organization that combines the liability protection of a corporation with the tax benefits of a partnership.
What is an S-Corp?
An S-Corporation is a corporation that has elected to be treated as a pass-through entity for tax purposes.
How do I form an S-Corp in Rhode Island?
To form an S-Corp in Rhode Island, you must first form a regular corporation and then file Form 2553 with the IRS.
What are the benefits of forming an LLC in Rhode Island?
Some benefits of forming an LLC in Rhode Island include limited liability protection, pass-through taxation, and ease of formation and maintenance.
What are the benefits of forming an S-Corp in Rhode Island?
Some benefits of forming an S-Corp in Rhode Island include limited liability protection, pass-through taxation, and the potential for tax savings.
Is there a minimum number of members required to form an LLC in Rhode Island?
No, Rhode Island does not require a minimum number of members to form an LLC.
Is there a maximum number of members allowed in an LLC in Rhode Island?
No, Rhode Island does not have a maximum number of members for LLCs.
Is there a residency requirement for LLC members in Rhode Island?
No, there is no residency requirement for LLC members in Rhode Island.
Is there a residency requirement for S-Corp shareholders in Rhode Island?
No, there is no residency requirement for S-Corp shareholders in Rhode Island.
How is an LLC taxed in Rhode Island?
By default, an LLC is taxed as a pass-through entity in Rhode Island, meaning that the profits and losses flow through to the members’ individual tax returns.
How is an S-Corp taxed in Rhode Island?
An S-Corporation is taxed as a pass-through entity in Rhode Island, meaning that the profits and losses flow through to the shareholders’ individual tax returns.
Can an LLC have employees in Rhode Island?
Yes, an LLC can have employees in Rhode Island.
Can an S-Corp have employees in Rhode Island?
Yes, an S-Corp can have employees in Rhode Island.
What are the annual filing requirements for LLCs in Rhode Island?
LLCs in Rhode Island are required to file an Annual Report and pay the associated fee.
What are the annual filing requirements for S-Corps in Rhode Island?
S-Corps in Rhode Island are required to file both an Annual Report and an informational return with the IRS.
Are LLCs required to hold annual meetings in Rhode Island?
No, LLCs are not required to hold annual meetings in Rhode Island.
Are S-Corps required to hold annual meetings in Rhode Island?
Yes, S-Corps are required to hold annual meetings in Rhode Island.
Can an LLC be managed by its members in Rhode Island?
Yes, an LLC can be managed by its members in Rhode Island.
Can an S-Corp be managed by its shareholders in Rhode Island?
Yes, an S-Corp can be managed by its shareholders in Rhode Island.
Can an LLC be converted to an S-Corp in Rhode Island?
Yes, an LLC can be converted to an S-Corp in Rhode Island.
Can an S-Corp be converted to an LLC in Rhode Island?
Yes, an S-Corp can be converted to an LLC in Rhode Island.
Are there any state-specific tax considerations for LLCs in Rhode Island?
No, Rhode Island does not have any state-specific tax considerations for LLCs.
Are there any state-specific tax considerations for S-Corps in Rhode Island?
No, Rhode Island does not have any state-specific tax considerations for S-Corps.
Can an out-of-state LLC or S-Corp do business in Rhode Island?
Yes, out-of-state LLCs and S-Corps can do business in Rhode Island if they register with the Secretary of State.
Is it advisable to hire a lawyer or accountant when forming an LLC or S-Corp in Rhode Island?
It is advisable to hire a lawyer or accountant when forming an LLC or S-Corp in Rhode Island to ensure compliance with state and federal laws.

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Conclusion

Ultimately, choosing an LLC and an S-Corp in Rhode Island 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 Rhode Island 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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