Starting a business can be very exciting. It is important to select the correct business structure to fit a given business’s needs. Depending on both the current situation and future goals of the business, one business structure may be better than another. Many business owners spend hours of time and money trying to decide between a limited liability company (LLC) and a subchapter corporation (S-corporation); however, both have pros and cons — again, depending on the nature of the business, itself.
An LLC is a kind of business structure that is available in every state. It has many of the same tax advantages as partnerships or S-corporations, but it does not have as many restrictions associated with shareholders. It protects a business owner, or member, from becoming personally liable – much like a partnership. In addition, it provides members tax benefits at the individual level – much like S-corporations.
In many cases, what makes an LLC better than an S-corporation is that an LLC does not restrict number of shareholders. S-corporations can only have up to 100 shareholders and the shareholders must be United States citizens. An LLC has no limit on the number of members and does not have any restrictions on the citizenship of its members. Consequently, people from outside the United States, domestic corporations, and other business groups may participate.
An LLC can have several kinds of stock. These kinds or classes of stock can be broken down between preferred or common stock. They can be sold at different prices and differ as to how dividends are paid. An LLC can also own stock in another corporation.
Setting up an LLC allows the business owner to avoid the double taxation — taxation at both the corporation and the personal level — that is associated with a traditional C-corporation; however, it still provides protection from personal liability and stock sales. It can be expensive to convert a fully functioning business into an LLC, so it is recommended mainly for new startup businesses. In addition, an LLC is regulated by state tax laws — so check with the Secretary of State to determine whether it is the correct choice for your new business.
An S-corporation is a corporation with less than 100 shareholders and one class of stock. All profits pass directly to the owners and are taxed as income – thereby preventing double taxation. An S-corporation is perfect for people who are in a lower tax bracket because any income earned by the S-corporation passes through to the shareholder and is taxed at the shareholder’s personal tax level. Thus, in that case, the overall amount of taxes paid will be less. Talk with an accountant before creating an S-corporation to prevent problems because so much depends on the future earnings of the company.