Starting a business involves making many subtle decisions that affect the future, one of these is choosing the right corporate structure. As an aspiring entrepreneur, you might be wondering: Should I organize my business as an LLC (Limited Liability Company) or an S Corporation?
To make the best choice you need to understand the benefits and drawbacks of these two options. Which is best comes down to your intent for the business and how much you are willing to restructure after it gets off the ground. Consulting with the knowledgeable attorneys at Clear Counsel Law Group can help you get started or finalize your business structure filings.
Overview of S Corporations
An S corporation is primarily defined by how it is taxed. Under the tax code, an S corporation allows income to be taxed at the owner level, rather than at the corporate level. This means the corporation itself doesn’t pay taxes on the income it receives. Instead, the income is passed through to the owners and they pay taxes on it. This structure avoids the double taxation typically seen in traditional corporations, where both the corporation and the owners pay taxes on the same income.
Overview of LLCs
An LLC, on the other hand, offers more flexibility. While it is a separate legal entity, an LLC can choose how it wants to be taxed. It can elect to be taxed like an S corporation, where the income flows down to the owners who then pay income tax. Alternatively, an LLC can choose to be taxed as a partnership. This flexibility is one of the reasons why many businesses opt to operate as an LLC.
When to Choose an S Corporation
Choosing to organize as an S corporation is generally considered when a business plans to go public in the future. Going public means offering your stock for public purchase on stock exchanges. It is typically easier for a corporation to go public than an LLC. However, corporations also have more stringent annual document requirements and other restrictions compared to LLCs.
Converting from LLC to S Corporation
If you start as an LLC but later decide to go public or want the advantages of being an S corporation, you can reorganize. An LLC can change its status by notifying the state that you’re electing to change to an S corporation and then fulfilling the necessary requirements. This process involves certain filings and administrative steps.
Why Most Businesses Choose LLC
The majority of businesses choose to be an LLC because of its flexibility and simplicity. An LLC can provide the same tax advantages as an S corporation if it elects to be taxed as such. Additionally, it does not have the same level of stringent requirements that corporations face. This makes LLCs a popular choice for many small and medium-sized businesses.
Consultation for Your Business Structure
Deciding between an LLC and an S corporation can be complex, especially when considering your business goals and the implications of each structure. If you’re starting a business and are unsure about the best structure for your needs, it’s wise to consult with an estate planning attorney. They can guide you through the advantages and disadvantages of each option, helping you make an informed decision.