When you’re choosing a business entity you will have to make decisions about the structure of your business. While there are several structures you can choose, the most common choice is between an LLC or an S-Corp.
LLC stands for Limited Liability Company. It provides you a separate identity and differentiates between the company and its owners. S-Corp, on the other hand, is not necessarily a separate entity. It just indicates that the company follows the Subchapter S, which refers to the way your company handles taxes, in which under this chapter, this business structure does not pay income tax. Instead, the corporation’s income and losses are divided among the owners or shareholders and are paid on each person’s personal tax return.
Want to know how to choose? Here are the pros and cons of LLC and S-Corp so you can pick the best structure for your business.
Pros and Cons of LLC
- LLC combines the benefits of pass-through taxation and limited liabilities.
- It can accommodate more than one member.
- It is a hybrid business structure, that combines the aspects of partnership and corporation attributes.
- It allows you to get a registered name so that no one can copyright any ideas of yours in the future.
- It is easy to register.
- It is functional and easy to maintain.
- It has a flexible organizational structure.
- It allows you less paperwork, which makes it easy for you to process in the day to day functions.
- It has fewer restrictions as compared to S-Corp.
- It has fewer reporting obligations.
- It provides attractive benefits to business owners.
- It provides you complete asset protection.
- It serves no benefit to single-member LLC owners, as they have to self-employed taxes.
- You have to choose a name that has not been registered already.
- There are chances, a business may lose its LLC registration if there is practically no difference between the owner and the LLC.
- You must file a form for articles of organization in your state, for LLC.
- You will have to discuss an operating agreement for the terms of LLC.
- You have to outline the regulations and procedures for proper functioning.
Pros and Cons of S-Corp
- Shareholders receive all profits from the company directly.
- Your company can sell some stocks when needed.
- It does not implement double taxation.
- The structure has more longevity than LLC businesses.
- Only the shareholders are taxed. The company is not considered a separate entity.
- Favors perpetual operation.
- It is more credible.
- Provides pass-through taxation.
- Applies the cash accounting method.
- Offers better tax benefits.
- You only need to file taxations once a year.
- Only applicable to US citizens.
- Higher fees of registration.
- Limits on issuing shares.
- Has restricted guidelines for the smooth functioning of businesses.
- Closer IRS scrutiny.
- Less flexible ownership structure.
- Corporations can only have one class of stock.
- Passive income limitation.
- Condition for additional state taxes.
- Shareholders must adhere to the S-Corp restrictions at all times.
Just to note, though there are several pros and cons, the goal is to choose the one that will be beneficial for your business. For example, if we’re talking about LLC or S-Corp for physicians, we can’t conclude unless we take into account the expectations the owners have for their company. It all depends on how you want to use your business model.
If you’re more comfortable in getting a proper salary than declaring yourself self-employed and believe in distributed capital, then you’re looking for an S-Corp model for your company. On the other hand, if you want to be the owner of your own firm and want to ensure your taxes are reported separately you should go with LLC.