Business owners have many options when deciding which legal entity their company should use. Limited liability companies or corporations (LLCs) and S corporations are popular among small business owners. Each has its own costs and benefits, and you can decide if one’s a good fit for you and your company.
What Is An S Corporation?
According to a business partnership lawyer, an S corporation, or S-Corp, has tax benefits to shareholders. Corporate income, deductions, losses, and credits pass to them for federal tax purposes. There’s no federal income tax for the corporation, but there is for shareholders, so there’s no double taxation.
What Is An LLC?
An LLC protects owners’ assets from creditors’ debts and liabilities that could be incurred through legal action. It combines some of the qualities of a corporation, partnership, and sole proprietorship. A single or multiple members can own an LLC. It has a pass-through income structure, so it avoids double taxation, too.
What Are The Pros And Cons Of Using An S Corporation?
In addition to the tax treatment, an S corporation offers shareholders limited personal liability, and shares can be easily transferred or sold (unless an owners’ agreement states otherwise). Disadvantages include the limited number of shareholders, they can’t issue different stock classes (which may impede your ability to raise capital), and they have the formalities that come with a corporate structure.
What Are The Pros And Cons Of Using An LLC?
Benefits of using an LLC according to our friends at Focus Law LA include liability protection to owners, they have a simple structure (without the shareholder meetings or board of directors the S-corps have), and the entity can be very flexible. You can set up an LLC for each business venture. If you invest in real estate, each property can have its own LLC.
There are fees to pay, outside investors may prefer to engage with corporations, and your state law may require your LLC to dissolve if membership changes (unless you have an operating agreement stating otherwise).
Where Do We Go From Here?
You should discuss your options with an attorney familiar with business formations. Come prepared with a list of questions, but if your attorney is experienced in this area of law, they may come up with issues and questions for you that you haven’t considered. Whether you choose an S-corp. or an LLC, if things don’t go as planned, you can convert it to a different entity in the future.
No matter what entity you choose, you should have a well-thought-out ownership agreement that will force those involved to think about the best ways to run the company and what should happen if:
- The owners can’t agree on significant issues
- A part-owner wants to sell their share of the business
- A part-owner becomes disabled, dies, or divorces
This should all be worked out before the business starts running. Planning and preparation are keys to preventing possible problems that may affect your company. Contact a lawyer near you for help with the structure of your business.