Deciding what entity type suits your business needs the best can quickly become a very tentative process. Some types such as non-profit organizations, are easy to understand, but people often get caught up between S Corps and LLCs.
Both these entity types has its unique set of advantages and drawbacks. We’ve put together the technicalities in both to make your understanding and decision easier!
LLC stands for ‘Limited Liability Company.’ The name is given on the bases of the liability protection it offers which is separating you from your company to ensure your personal assets are not at risk in any troubling case faced by your company. For this reason, taxes on LLCs are passed similar to sole proprietorships and are the most common and popular.
Still, even if you run a small business, it does not mean an LLC is the option for you. Owners looking to raise company investments will find LLCs are not suitable, or someone operating in specific industries such as finance may be prohibited from registering as an LLC in their locale.
Liability: this is the most valuable asset of an LLC; once the business is separated from your personal self, your personal assets such as car, house etc. will not be implicated in case the company goes into debt or is sued (these are just an example off liability protection).
Ownership: LLCs don’t have any such ownership limitations that other corporate entities might. An example can be making foreign members a part of your company is not prohibited in LLCs.
Taxes: LLCs are taxed as part of your income instead of your company being taxed on its own. In fact, you can choose what entity it gets taxed as!
Profit Distribution: Profit shares in LLCs get broken down and distributed however you decide. There is no restriction in terms of the profits differing from the ownership percentage.
Compliance: LLCs feature minimal requirement of effort to keep up with regulations. You get full control on conducting meetings and documenting processes.
Taxes: Chances are you’ll wind up with additional federation inclusion costs and higher tax costs with this structure, apart from facing trouble in self-employment taxes.
Banking: You ought to use separate cards and bank accounts to manage your personal and business expenses. It will make distinct you and your business as separate entities.
Record-Keeping: Documenting your personal finances independent to our business documentation will take up your time as you will need to ensure both are separately filed.
Termination: If a member exits the organization, the LLC will get terminated, regardless of the shareholders that depart.
S Corp is a pass-through entity -like LLC- but unlike LLCs, S Corp stock can easily be transferred and may reduce liabilities on your self-employment taxes. S Corps were introduced as a way to relieve double taxation.
Your company has to be based in the U.S. to qualify for an S Corp. After that, there are a couple important points on the check-list to register as an S Corp, including having less than a hundred (100) shareholders and one class of stock.
Limited Liability: Shareholders are not liable on personal levels for any lack in the company finances; neither can your personal assets be implicated.
Taxes: Your S Corp will be exempt from federal income tax and all that’s mentioned regarding taxes in S Corp above is implied. The pass-through nature keeps you from double taxations, however, capital gains and passive income applies.
Ownership Transfer: You can transfer shares much easier with an S Corp and even ownership without significant tax consequences or early termination.
Income: S Corp allows you to characterize income in different ways; you can choose to pay yourself a salary or dividends, and reduce self-employment tax.
Ownership: You have to meet an array of different requirements for the ownership structure, despite the ownership transfers being easy.
Wages and Dividends: If you abuse the permission on wages and dividends, it could get you in trouble with the IRS. And if your activity is declared inaccurate, you will have to recharacterize your income and pay a higher amount in taxes.
Tax Qualification: Any errors in qualifying your business as an S Corp will cost you the loss of your company. The amendments it comes with to make your business life easier have strict regulations that must be met and upheld, but they are also easy to maintain.
Of course you must take time to consider what suits you and your business the best, but LLCs are more so the easier option for small companies. However, your circumstances can lead you to find out an S Corp suits better. Whether you go ahead with an S Corp or choose to stick to an LLC, BizInc is here to help you out!