Irrespective of the type of business you run, “making it legal” is an important step. There are distinct advantages to both incorporating your business as an S-Corp as well as forming your company as an LLC. A small amount of money and a few moments of your time can ensure the protection of your personal assets, besides helping your business run more professionally and efficiently.
But what type of business formation is right for your business? While some companies choose to register as partnerships, non-profits, or C-Corps, the choice often comes down to incorporating as an LLC or an S-Corp for most businesses.
In comparison to S-Corps, more people start LLCs each year. When contemplating whether to form an LLC or an S-Corp, remember that limited liability companies are slightly easier to start and operate. Also, they generally warrant less vigilance to remain compliant. There are some distinct benefits of starting an LLC, including:
LLCs offer liability protection for their members, meaning that your personal assets cannot be used to settle losses, debts, or any court rulings against your enterprise.
LLCs are “pass-through entities,” which means that it is much easier to deal with business taxes, but it could also mean that you will be paying those taxes on your personal tax return. However, you can choose to be taxed as a business entity.
LLCs offer substantial flexibility. The corporate management structures of other types of business entities are much more rigid compared to those of an LLC. An LLC Operating Agreement actually allows you to develop the management structure that you desire.
There is far less documentation involved in an LLC, both upfront and in the long term. This allows them to be easier to operate and to remain compliant with local and state regulations.
In the United States, the largest and most profitable businesses are typically corporations. Bear in mind that there are two distinct types of for-profit corporations, S-Corps and C-Corps. If you are deciding between an LLC and S-Corp, you should consider the following advantages of an S-Corp to arrive at an informed decision:
Liability Protection for Shareholders
Shareholders in an S-Corp have liability protection. In this case, only the money invested in the S-Corp by its shareholders is at risk, apart from exceptional circumstances. As with LLCs, personal assets are typically protected in an S-Corp.
S-Corps are not taxed, but the corporation’s shareholders are. For instance, if there are four partners to your business and your S-Corp made a profit of $40,000 in the previous year, you will each receive $10,000 in profit distributions, which would be taxed as capital gains. Your S-Corp will be required to file an IRS 1120 S form, but S-Corps are “pass-through entities” like LLCs and are not taxable by themselves, without considering other factors.
More Lucrative to Investors and Shareholders
S-Corps appear more lawful, and investors usually view the corporate structure as more stable than an LLC. The management structure of S-Corps is more rigid. Besides, all S-Corps have strict rules to follow to remain complaint, voting policies on corporate practices, etc. Therefore, shareholders and owners have a clear and well-defined path to follow, and investors are familiar with this path.
S-Corps necessitate more documentation. While this may seem disadvantageous, it actually offers you a more robust record of your decisions and evidence that you acted in the company’s best interests. This may feel tedious, but this paperwork can be quite valuable for the purposes of liability and taxation.
Ability to Raise Capital
S-Corps can sell stock to raise capital, although there are a limited number of shareholders. In the case of an LLC, only interest in the company can be sold.
An important aspect to consider when forming a business entity is taxation. But there is no reason to despair if you have already formed your business entity but are not happy about the tax implications. For better taxation prospects, you could choose to convert your LLC into an S-Corp or elect to be taxed as an S-Corp. This may be a good way to avoid self-employment taxes.
Think about how you interact with your business. Are you the sole employee? Are you working in your enterprise every day, or are you a silent owner? While there is no simple answer to which tax classification you should choose, our seasoned lawyers may be able to assist you in picking between an S-Corp vs. LLC.
LLC vs. S-Corp: Summary
There is a certain measure of personal liability associated with both LLCs and S-Corps. Both these company types offer overall legitimacy and represent solid options if you seek to upgrade from a partnership or sole proprietorship or if you are just starting your business enterprise.
However, it is a good idea to consider an S-Corp if you plan to raise capital, seek maximum protection, or plan to look for investors. On the other hand, if you do not want to sell shares of the company and prefer less documentation but want more flexibility, an LLC would be a better option.
Speak to a Committed and Knowledgeable Attorney for Business Formation Advice
One of the most vital decisions you will make is choosing the right law firm to manage your personal and commercial matters. An experienced lawyer can save you time and money and prevent any potential disputes and complications.
At the law offices of Davis, Bingham, Hudson & Buckner, P.C., our attorneys offer clients guidance on complex legal matters like business entity formation. For a free consultation, call us today at (334) 821-1908.