LLC vs. S corp – which is right for your business? If you found your way here, I already know that you value running a responsible and legal business, so we are off to a great start. Too often, entrepreneurs go into business completely unprotected. We follow our passion, and try to figure things out as we go. Although that certainly works for some things, your business legal and tax structure shouldn’t be something you gamble. We are going to break down LLC vs. S Corp structures more below.
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Different Types of Corporations: LLC, S Corp, and More
If you’ve done a google search or two, you know that there are sole proprietorships and partnerships. The problem is, they generally have unlimited personal liability. That makes many new business owners turn to corporations to protect themselves. For those looking for an easy set up and a structure that fits most small businesses, you will likely consider will be an LLC (limited liability company) or an S-Corporation. We will compare an LLC vs. S Corp structure below.
LLC : Limited Liability Company
An LLC can be owned by one individual or multiple people instead of stockholders. An LLC is the simplest way of structuring a business while still having your personal assets protected.
When you choose to have an LLC, you receive personal liability protection. What this means is that no matter what the debt of your company, your business creditors cannot come after your personal assets (such as your car, home, or personal income). I know we don’t want to expect the worst, but if we can take one lesson from 2020, it’s that we need to expect the unexpected and protect ourselves.
What is an S-Corporation?
An S-corporation (or an S subchapter) is a bit more specific. This type of corporation cannot have more than 100 stockholders within it so it is generally designed for businesses that plan to keep their corporation small.
If you are considering an S Corp, know that the company must be (and remain) within in the United States. Their shareholders must not be other corporations, non-domestic aliens, or partnerships. Their shareholders have to be individuals, estates, etc residing in the USA.
Tax Structures for an LLC vs. S Corp
Limited Liability Companies offer pass-through taxation. This is similar to what you see in a sole proprietorship or partnership structure. In pass-through taxation, your business does not pay federal income taxes as its own entity. You will pay taxes on your income, similar to the way you would if you had a sole proprietorship. This makes taxes easier on the individual and the company every year.
S corp structures avoid double taxation as well (when the business & shareholders are both taxed). Stockholders must report gains and losses from their stock in the company on their personal income taxes yearly. This puts the onus on the individual, and therefore makes things much easier for the company at tax time.
Similarities Between an LLC and S Corp
Both LLCs and S-Corporations have limited liability protection. As a business owner, under either structure you are not personally responsible for any debts that the business incurs throughout its time. Your creditors cannot go after your personal assets because of business debt.
Both of these types of business structures are also subject to regulations and fees from both the local government and the federal government. Depending on where your business is located and what type of business you have, the forms and regulations may be different so additional, local research is often required.
LLC vs. S Corp: Main DifferencesAs similar as they might seem, there are a few differences in LLCs and S-Corporations. There is not one structure that is better than the other necessarily, most of the differences below will depend on the long-term vision you have for your business (and whether or not you intend to do business outside of the USA).
S-Corporations can have no more than 100 stakeholders to stay an S-corporation and everyone must reside in the US (and stock holders must be people, not businesses). LLC’s on the other hand, can have an unlimited number of owners/members within the company and international citizens can be part of the company in any role.
LLC vs. S Corp – Deciding which is right for your business
At first glance, LLCs and S-corporations seem very similar (let’s be honest – you were mainly concerned with the tax structure!). However, when we get into the details, we find limitations that may or may not affect your business in the long term. The first step would really be to look at both your short term and long term goals, and then decide on the right structure for you.
In general, LLCs are the better choice for companies that want more than 100 people involved in the business (or want more freedom to decide who can be involved in their business – like partners that may reside outside the USA). LLC’s also have less local and federal regulation overall.
S-corporations are the better choice for companies that are starting small or planning to stay small, under 100 people. S corps are a good choice for those who want stakeholders in their company rather than the creators running it by themselves.
Here at Legally Set, we are incredibly passionate about helping small business owners protect their businesses with attorney-drafted contracts, policies and templates which you can shop for here. If you have made it this far, I know you take being a responsible and legal business owner seriously (even if you did start your own business from passion and coffee). If you have any questions, you can contact us here.
*Please note that this post is for informational purposes only and is not intended to substitute legal advice from your own attorney. I am an attorney, but I am not your attorney and individualized advice/information is always recommended.