Once you are strong in your decision to start a business, the very first step to take before digging into a formal part is to choose a business structure for your future venture. In fact, this choice is highly important since the business structure is the core component that will greatly impact many aspects of your business activity. Primarily, though, it’s about assets distribution and taxation. Hence, many beginner entrepreneurs usually end up choosing between an LLC and an S-Corporation as the two most popular legal frameworks for startuppers.
So, an LLC or an S-Corp? While it’s rather a question to an attorney or a business consultant at https://bestllcservices.co/, it’s always nice to have a general idea about how these two business structures stack up and function. If you plan to hire one of the best LLC services to take you through the business formation process, you can find a lot of info on their websites. And if you favor a DIY route, we’ve made a quick overview on this issue.
S-Corp or LLC Formation: What They Have in Common
First off, let’s look at what these two business structures are. For the start, an S-Corp is not actually a business structure, unlike an LLC. It’s rather a tax classification for IRS purposes. And it requires the establishment of a corporation or a C-Corp first. A corporation is normally founded by several co-owners who share the same business goals. The ownership rights are distributed pro-rata to each owner’s contributions to the corporate equity. Meanwhile, neither of the co-owners is personally liable for the corporate financial obligations, which is a big plus of this entity type.
A limited liability company or an LLC speaks for itself. Limited liability stands for the limited personal liability of the company owners in business obligations. In other words, LLC company members have no personal commitments on business-related financial issues and their personal assets are protected against those commitments as well. A relatively new business form, an LLC combines a corporate limited liability shield or a corporate veil with a more simple management structure of a proprietorship.
As you can see, a common feature for both business structures is limited liability protection. And this is one of the biggest advantages of these two business forms. Ensuring that your personal savings and funds are securely protected from business liabilities is by far the best motivation for entrepreneurs who stand on the verge of business incorporation. They can start their business in a lawful manner with peace of mind about their own property.
S-Corp or LLC Formation: Major Differences Between These Business Structures
At a glance, LLCs and S-Corps look very much alike. What’s more, given that an S-Corp is a kind of tax classification for business structures in the eyes of the IRS, LLCs can even choose an S-Corp status for taxation at the stage of business formation or at any time afterward. However, these business forms do have a lot of differences that lie in many essential aspects.
- Business Formation: While an LLC boasts a fairly simple and straightforward formation process, a corporation is distinguished by a more complicated formation with a lot of formalities to follow and paperwork to complete. More than that, setting up a corporation will cost you much more than opening an LLC.
- Ownership Rights: LLCs are meant to be simple. So, LLC owners are the only ones to decide about the profit distribution and company management. Meanwhile, corporations are bound by strict corporate rules obliging the members to buy a share in the company and splitting the profits proportionally to those contributions, not to mention a multi-tier managerial hierarchy that, on the one hand, gives better control over the company yet, on the other hand, might turn out a limiting factor on some quick operational issues.
- Taxation System: Both S-Corps and LLC companies are “pass-through” entities for taxation purposes, with company profits and losses transferred to personal returns of their tax owners, thus, leaving double taxation at bay. However, S-Corps have some limiting factors such as restriction on business entities as company members, as well as on a total number of shareholders that should not exceed 100 members, and on issuing only a single stock type. At the same time, LLCs can be taxed as S-Corps to further optimize some tax payments.
- Fund Raising: Added capital and funds are essential for business growth. In this concern, an LLC company is a less attractive structure for investors, especially if those investors are legal entities. LLCs can raise capital by inviting new co-owners while S-Corps do that by selling shares, which is a more common method for venture investors.
S-Corp or LLC Formation: Do I Need Any Help?
Whatever business structure you choose, you can go either a DIY route or seek some professional help when it comes to the business formation process. If you are a first-time entrepreneur or a beginner businessman with little to no experience in formation formalities and routines, some help will never go amiss. Hiring a lawyer or an attorney is always a good option, yet it’s quite an expensive one since legal advisors usually have per-hour rates. On the other hand, the modern legal market abounds in LLC websites that provide professional service in business incorporation. Such top LLC companies as LegalZoom or Rocketlawyer offer a whole range of services in launching all types of business entities at affordable prices and in a quick manner. They will handle all formation routines for you allowing you to focus on business development and growth strategy.
Bottom Line
With LLCs and S-Corps being the two most popular business forms, there is no clear-cut answer to the question of which of them is better for your business. Each of these business structures works better for a certain business scenario. Thus, nationwide corporate law and investor-friendly character make corporations an optimal choice for larger-scale businesses with ambitious growth plans and presence in various states. Meanwhile, LLC companies are the best legal framework for smaller businesses and startup projects with limited budgets seeking management and taxation flexibility.