LLC vs. S Corp: What’s the Best Setup for Your Startup?
posted January 31st, 2017 by Tricia Hussung
Entrepreneurship enables business professionals to work on their own terms and create impactful, solution-based products and services. However, entrepreneurs face many decisions that can determine whether or not their business is sustainable in the long term. Deciding on a new business or startup’s structure is one of the most critical decisions an entrepreneur will make.
Choice of corporate structure affects issues ranging from “financing and growing the business, the number of shareholders the business has and the general manner in which the business is operated,” according to Investopedia. Two of the most popular options include limited liability company (LLC) and subchapter S (S corp).
LLC vs. S Corp
Both LLCs and S corps are types of corporations. Many business leaders choose to incorporate due to the limited liability corporations enjoy, though there are other reasons that corporations are attractive: “It’s traditionally the reason businesses incorporate. It is also a structure people understand. A separate legal entity, it is owned by shareholders, ruled by a board of directors who elect officers to do day to day management,” according to Forbes.
An LLC combines many of the characteristics of a corporation, a partnership, and a sole proprietorship. It is a corporate structure in which “the members of the company cannot be held personally responsible for the company’s debts or liabilities,” Investopedia explains. The limited liability that defines LLCs is what makes them similar to corporations, while flow-through taxation to LLC members is a feature of partnerships.
S corps are corporations that have 100 shareholders or less. This structure combines the benefits of incorporation with partnership taxation. “The corporation can pass income directly to shareholders and avoid the double taxation that is inherent with the dividends of public companies, while still enjoying the advantages of the corporate structure,” according to Investopedia. In addition to the shareholder requirement, a company must be a domestic corporation and have only one class of stock to be considered an S corp, Inc. contributing editor Darren Dahl says.
Advantages of an LLC
One of the main benefits of choosing an LLC structure is that entrepreneurs are able to maintain their status as sole owner of a business while still forming partnerships with other agencies. As the name suggests, LLCs also offer limited liability, protecting owners in the case of judgments and debts. This means that assets like homes and vehicles are not subject to risk. While LLCs do have to file articles of organization with the state, they have a more flexible management structure than corporations and owners can create a structure based on their specific requirements.
Owners of an LLC can also decide to be taxed as a sole proprietorship, partnership, or corporation, All Business points out. Finally, LLCs face fewer compliance issues than other structures. “In most states, an LLC doesn’t need to have an annual meeting, and the LLC isn’t required to have a board of directors. Plus, there’s less paperwork and recordkeeping required compared to a corporation,” All Business continues.
Advantages of an S Corp
A key advantage of choosing an S corp structure is that doing so eliminates double taxation because profits and losses are passed to shareholders. In general, this means that taxes must only be paid once. S corp owners are also free from paying the self-employment tax. It is important to note that in some states, S corps are taxed as C corporations. In addition, some states charge S corporations a state tax.
Because this type of business structure can have up to 100 shareholders, it is easy to attract investors. In addition, S corp owners benefit from liability protection. Similar to LLCs, personal assets remain separate from those of the business. Another benefit of choosing an S corp is that, provided the S corp doesn’t have inventory, it “can use the cash method of accounting, which is much simpler than the accrual method,” All Business explains.
Graduate Business Education at King University
Deciding how to structure your business is just the beginning. Entrepreneurs should be prepared for the challenges and demands of running a business, and one of the best ways to do this is through advanced education. King University’s online MBA program gives professionals the skill sets required to create financially solvent businesses. With multiple specializations available and coursework in management, research, quantitative analysis, ethics, and more, you will graduate with the knowledge and competencies for ongoing success. Find out where an MBA from King University can take you today.