The most common mix-up
Business owners often ask whether they should form an "LLC or an S-corp," but those are different kinds of decisions. A limited liability company (LLC) is a legal structure. An S-corporation is a tax status elected with the IRS. An Arkansas LLC can elect to be taxed as an S-corp, and so can a corporation.
Why most Arkansas small businesses start as an LLC
- Liability protection. Properly maintained, an LLC separates business debts and lawsuits from your personal assets.
- Simple to form. You file a Certificate of Organization with the Arkansas Secretary of State.
- Flexible management. Owners set the rules in an operating agreement rather than following corporate formalities.
- Pass-through taxes by default. Profits are taxed on the owners' returns, not at the company level.
Arkansas LLCs and corporations file an annual franchise tax report with the Secretary of State, due May 1. Missing it can put the company out of good standing.
When S-corp tax treatment makes sense
By default, an LLC owner who works in the business pays self-employment tax on all of the profit. With an S-corp election, the owner takes a reasonable salary (subject to payroll taxes) and may receive the remaining profit as distributions that are not subject to self-employment tax. Once profits are high enough, the savings can outweigh the added payroll and accounting costs. Below that point, the election often is not worth it. Your CPA should run the numbers for your situation.
What about a corporation?
Corporations, including C-corporations, fit businesses planning to bring in outside investors, issue different classes of stock, or eventually go public. They require more formality: bylaws, a board, and regular meetings and records.
Mistakes that cost Arkansas owners later
- Skipping the operating agreement, which leaves ownership disputes to default rules
- Mixing personal and business money, which can weaken liability protection
- Forming a single entity for several risky ventures instead of separating them
- Forgetting the annual franchise tax report
- Signing contracts personally instead of in the company's name
Start your business on solid footing
Buck C. Gibson, P.A. helps Arkansas owners choose and form corporations, S-corporations, LLCs, and partnerships, and draft the contracts and planning documents that protect them as they grow. Learn more about our business law practice.
This guide is general information about Arkansas law, not legal advice, and reading it does not create an attorney-client relationship. Laws change and every situation is different; please talk with an attorney about yours.
About the author
Buck Gibson, Managing PartnerUniversity of Arkansas at Little Rock William H. Bowen School of Law. Licensed since 1997. Searcy City Attorney for 20 years.
