Starting your own business can be a tremendous opportunity that is fraught with challenges. When you have an idea, a marketing plan, and the enthusiasm to go out on your own, you need a legal partner. One of the first legal choices is the business structure: whether to create a Limited Liability Company (LLC) or a Subchapter-S Corporation (S-Corp.)
Benefits of an LLC:
- LLCs provide liability protection for the members. Your personal assets will be protected against debts, losses, and court judgments against the business.
- LLCs are “pass-through” entities for taxation. The LLC doesn’t pay income taxes; the profits are passed to the members. Dealing with business taxes is much easier because you pay those taxes on your personal 1040 return.
- LLCs provide great flexibility. Management structures are less rigid than those of an S-Corp. Within the Operating Agreement, you can create the management structure of your choosing.
- LLCs have far less paperwork up front and in the long-term. This makes them easier to run and to keep compliant with state and local laws.
Why to Start an S-Corp:
- S-Corps provide liability protection for the shareholders. Only the money invested in the S Corporation by its shareholders is at risk. Personal assets are protected.
- S-Corps are not taxed, but shareholders are. While your S-Corp will need to file IRS 1020 S form, S-Corps are “pass-through” entities, much like LLCs are.
- S-Corps can sell stock to investors to raise capital. Investors often view the corporate structure as more permanent than that of an LLC.
- S-Corps have a more rigid management structure. There are rules for how to remain compliant, who can vote on corporate practices, and the authority of the shareholders to act. These rules give shareholders and owners a clear path to follow.
- S-Corps require more paperwork. This may seem like a disadvantage, but the additional paperwork actually gives you a concrete record of your decisions and proof that you acted in the best interest of your company. Having these documents can be valuable for tax and liability purposes.
Both LLCs and S-Corps will provide personal liability and a legitimate business structure. They’re both good options if you are just starting your business. Check with an experienced attorney to determine which corporate structure is right for you.