Choosing the correct business entity is one of the first steps in starting a company. While C Corporations and nonprofits are self-explanatory, several small business owners struggle to differentiate between an LLC and an S Corporation.
Each has its perks and cons, but you may not know them yet. We’re comparing the two business structures to help you choose between S Corp and LLC.
What Is an LLC?
As their name implies, LLCs offer businesses limited liability protection. An LLC structure enables a company owner to isolate their private assets from the firm, so company assets and debts can’t affect their finances. Due to this distinction and its pass-through taxation, LLCs are preferred among small and new firms.
An LLC isn’t always the greatest business structure, though. You’ll need to investigate. Companies wishing to generate investment capital would benefit from a more strong structure, while enterprises in finance and other industries may be prevented from registering as an LLC.
Small business operators can enjoy large-company perks without overcomplicating economics. LLC is quickly becoming the go-to company entity for new entrepreneurs.
What Is an S Corporation?
S Corp is a pass-through company entity like an LLC, but it has special advantages. Unlike LLC ownership, S Corp stock is easily transferrable and can minimize the self-employment tax burden.
As your firm grows, this is crucial. S Corp tax law was introduced to encourage small business growth by reducing double taxation in standard corporation structures.
An S Corp has more IRS requirements than an LLC. First, you must be a U.S.-based corporation. You can have no more than 100 shareholders and one class of shares; just like with LLCs, financial and insurance companies may not be able to register as S Corps.
S Corp vs. LLC: Differences
LLC is a legal form of corporate organization, while an S corporation is a tax designation. If an LLC meets specific requirements, it can be converted into an S corporation. However, the management and shareholder structures and the reporting requirements for LLCs and S corporations are distinct.
Owner Employment
S businesses can have a salaried workforce and pay their owners. Like a corporation, an LLC can also pay its owners a salary. After paying appropriate salaries to the shareholders of your LLC, you may be able to save money on taxes by filing as an S company.
Ownership Structure
LLCs operate similarly as sole proprietorships and partnerships, by default, under their structure. The owners (members) of an LLC, on the other hand, are not limited to those who reside in the country in which the LLC is formed.
An S corporation can have no more than 100 shareholders and must be a U.S.-based firm controlled by U.S. residents. S corporations restrict ownership to trusts and estates rather than individuals.
Management Structure
A board of directors makes high-level corporate decisions. Shareholders elect directors of the board. Officer jobs, including treasurer, vice president, and president, supervise everyday business operations.
Instead of directors, LLCs are run by managers. Owners can take an active role in the company’s management (as in a member-managed LLC) or choose to delegate management responsibilities to others (a manager-managed LLC). An LLC can designate officer positions if that structure makes sense for the company’s overall strategy.
Stock and Shareholders
It is only possible for an S corporation to issue common stock, allowing shareholders to vote. In contrast to a corporation, an LLC must make payments to its members following its articles of incorporation and cannot issue stock or have shareholders. If your LLC is classified as an S corporation, you can’t issue stock.
Cost of Getting Started
Establishing an LLC and electing S corporation status can be pricey. Your status can change depending on where you live and whether or not you conduct business over state borders. The cost of legal assistance is higher, but it is likely to save you both money and time by guiding you away from typical pitfalls.
There is a wide variety in the cost of filing incorporation papers, from $100 to $250* based on the state in which the company is registered. The cost of forming an LLC ranges from $50 to $500, depending on the state in which you live. If you operate as an LLC in other states, you will have to pay an extra foreign business registration fee for each of those states.
The Verdict
Even though an LLC is the most common choice for small enterprises, you may find yourself in a situation where an S Corp is more appropriate. To conclude, you’ll need to give it some thought and time. When you’re ready to register your corporation, we are here to help.