The issue of whether to incorporate your business or not is a common question among prospective business owners. It’s also an exciting one, as it’s the next step in a journey to a successful business.
There are several types of business structures to choose from, including an LLC, C-Corp, Nonprofit, Professional Corporation, and S-Corp. Many small business owners elect to pick either an LLC or an S-Corp as their preferred business structure.
LLC stands for Limited Liability Company and is the most common form of business entity for a small business. An S-Corp is type of legal entity that is owned by its shareholders, be that one shareholder or up to 100.
Both types of business structures boast advantages that make them attractive to business owners, the two main advantages being tax benefits and personal asset protection. These make LLCs and S-Corps similar in nature.
Personal liability protection and tax benefits
In an LLC, members of the business are not held personally responsible for the company’s liabilities or debts, meaning their personal property cannot be seized to pay off the company’s debts. Similarly, S-Corp status also ensures personal asset protection for its members, so the company’s officers, directors, and shareholders cannot be held responsible for the company’s debts.
There are also tax benefits associated with both LLCs and S-Corps. Incorporating as one of these two business structures allows you to avoid double taxation, i.e. paying personal taxes on top of paying corporate taxes.
Differences between an LLC and an S-Corp
Both LLCs and S-Corps offer good limited liability protection and tax benefits. So what are the differences between the two?
LLCs are able to have an unlimited number of members, while an S-Corp is limited by the IRS to having a maximum of 100 shareholders. LLCs offer a more informal type of business structure with less required formalities, while S-Corps must follow more rigid formalities, including adopting bylaws, issuing stock, and holding shareholder meetings.
Another major difference between LLCs and S-Corps is in management. An owner or owners of an LLC can have other members manage the company, while an S-Corp must have directors and officers who oversee all major business decisions in the company. Directors elect the officers to oversee daily business activities.
Which business structure should you choose?
So which business structure is right for you – LLC or S-Corp? Generally speaking, an LLC is easier to start and requires less steps and paperwork to do so. Therefore, if you’re starting a new, small business and don’t anticipate brining on shareholders, an LLC could be your best choice. On the other hand, if you anticipate rapid growth and the need to bring on investors and shareholders, you may be better off forming an S-Corp. The steps and costs to do so are greater, but the benefits of bringing on investors will outweigh those costs.