When you start a business, you have different business entities to opt from. LLCs and S corporations are famous options, but they differ in several ways, from taxes to management structure. In a few examples, a business is both an LLC and an S-corp. Here is what you should know about these businesses and their differences before you decide which is right for your business.
What is an LLC?
An LLC is known as a “limited liability company,” and it is a business structure that is able to protect the personal assets of the owners. If the business gets tangled in legal troubles or is sued by a debt collector, the plaintiff and creditor can go after the assets of the business, not the personal assets of the limited liability company members.
What is an S-corp?
An S corporation also referred to as an S-corp or S subchapter, is a tax election that allows the IRS to know your business should be taxed as a partnership. It will prevent your business from corporate-level double taxation. To become an S-corp, your business first must register as a C corporation or limited liability company.
What are the differences between an S Corp, LLC, and C Corp?
Amongst the several forms of business structures available, many businesses are operated as an LLC or a corporation. If a corporation is selected there’s an option of whether to be taxed as an S corporation (if the corporation meets the restrictions of Subchapter S of the Internal Revenue Code or a C corporation. If LLC is selected there’s an option of whether to be taxed as if it was a sole proprietorship (if it has one owner) or a partnership (if it has 2 or more owners), an S corporation (if it meets the restrictions of Subchapter S) or a C corporation). When compared to each other, everyone enjoys both differences and similarities. As a thumb’s rule, the LLC is the most flexible of all of the business forms when it comes to deciding how it’ll be managed and how the financial interests of the owner will be split up. It is more flexible in how it can be taxed for income tax purposes, as it can elect to be taxed as an S corporation or a C corporation, instead of as a partnership or sole proprietorship while a corporation can’t select to be taxed as a partnership or sole proprietorship. Frequently an LLC will enable more tax-advantaged transfers of ownership interests to family members.
On the other hand, it is easy for corporations to get outside funding as a few investors and banks prefer to invest in corporations than LLCs. If your plan on attracting venture capital or doing an initial public offering (IPO) in the future, a corporate business structure is a good option. If that’s the case you must let the corporation be taxed as a C corporation. IRS rules, amongst other things, limit the number and type of shareholders an S corporation can have which can make it unavailable for venture capital or IPOs.
Is there a best choice among LLC, and S Corp?
When choosing your business structure, if you ask yourself the question, Will this matter to me in 5 to 10 years? The answer will be yes. The type of entity you opt for your business affects taxes, day-to-day management, control, financing, exit plans, and several other features of your business. The differences help “narrow down” your options in determining which form is great for your perfect requirements and business. The value of professional advice earlier on frequently pays for itself, many times over, by saving both money and headaches as your business grows. Talk with an experienced, knowledgeable advisor at the outset about which type of business structure serves your objectives.