There are a number of factors to consider when determining which legal structure to give your business. You will want to think about your short- and long-term goals, your preferred management style, your tax incentives, and limitations, and much more. That is all to say, what you ultimately decide on should not be arrived at lightly. You know as a business owner that the choices you make can impact your bottom line and livelihood, and landing on a business structure is just such an important decision. For this reason, you are going to want to educate yourself a bit, and figuring out which is better, an LLC or S-corp may be a good starting point in this process.
Both Limited Liability Companies (LLCs) and S-corporations have their advantages and disadvantages. In other words, what is right some businesses may not make sense for others. What you ultimately choose may depend on your industry as well as how you prefer to manage your business on a day-to-day basis.
What Is an S-Corp?
An S-Corporation is a mode of business structure. It is taxed under the subchapter “S” in the Internal Revenue Code issued by the Internal Revenue Service (IRS). In an S-Corp, you can pass income, deductions, credits, and losses to shareholders without paying a federal corporate tax. This makes an S-Corp what is called a “pass-through” entity.
Apart from this unique tax consideration, an S-corp is similar to other corporations. You must have a board of directors, and shareholders, and adhere to many of the same reporting requirements and rules that other corporations face. An S-corp does enjoy limited liability protections. These structures can be costly to set up and maintain, which can be a deterrent for owners of smaller businesses.
Understanding the Concept of a Limited Liability Company
An LLC is a business structure primarily built around the concept of limited liability. This privilege allows members of the LLC to protect their personal assets and property from any judgments or bankruptcies that their business may face. This removes a fair degree of risk from launching a business, so many entrepreneurs find LLCs to be appealing. Additionally, LLCs have the same IRS pass-through status that is given to S-corps. In contrast to corporations, however, LLCs are owned by members and not shareholders. They are also beholden to fewer rules and regulations and are relatively inexpensive to form and maintain.
LLC or S-Corp: Which is Better? It Depends
With a bit of knowledge about the unique and shared qualities of LLCs and S-corps, you can better position yourself to decide which structure suits your business. Ultimately, it will depend on your needs and goals. If you have a small operation, an LLC may make more sense for you. If your business is a bit more ambitious in its scope, you may find that an S-corps couples tax incentives with an ability to raise investment that is hard to ignore.
Regardless of what you choose, Corporation Center can help. We have online forms for creating LLCs and S-corps in all 50 states. To learn more about our services, visit our FAQ page, or contact one of our customer service representatives by phone or email today.