Choosing the Right Business Entity
When starting a small business, many entrepreneurs end up deciding between two types of business entities—LLC vs. S Corps. It is important to understand that an S-corp indicates how a business is taxed—it is not a business structure, unlike an LLC. A single-member LLC and S-Corp both allow business profits/losses to be reported on personal taxes, but an S-Corp allows all shareholders to do so.
LLC vs. S-Corp Taxation
LLCs offer pass-through taxation without the double taxation of C-corps. The profits are reported on the owner’s personal tax rate and not at the corporate level. In contrast, forming as an S-Corp allows an owner to be treated as an employee and potentially save on taxes.
LLC and S-Corp Ownership
An LLC can act as an investor in a corporation, but S corporations can only be owned by actual individuals, not business entities.
Factors Influencing Entity Selection
Considerations for Small Business Owners
Before forming an LLC, small business owners should consider the reporting requirements and management flexibility. LLCs may have fewer reporting requirements and are generally easier to manage than corporations. However, LLCs might face challenges in capital raising since they cannot issue stock, which can limit investor attraction and funding opportunities.
Tax Implications
LLC owners must decide whether to adopt the default tax classification or elect to be taxed as an S-Corp. While LLCs taxed as S-Corps can offer tax advantages, especially in terms of self-employment tax savings, the tax return process becomes more complex.
Key Takeaways
LLCs and S corporations offer different levels of liability protection, taxation benefits, and management structures. Business owners should consider the level of risk, the need for asset protection, and the amount of control required to determine which option is more appropriate for their business needs.
Contact for Assistance
For further assistance or questions regarding incorporation, individuals may contact Sam at [email protected] for personalized guidance.