You finally have the kinks ironed out of your innovative business idea. Congratulations! Now it’s time to work out the details that are so important to the success of your new company.
The first step for many first time business owners is deciding the ideal corporate structure for their new company. While there are several structural options, a good place to begin your research is understanding S corps and LLCs. These two structures are extremely similar in some ways, but have a few very important differences as well. As a result, it’s easy to see where some confusion can arise.
Read ahead for some important similarities and differences between S corps and LLCs.
Personal asset protection: similar
Typically, the most attractive incorporation benefit for small and medium businesses is personal asset protection in times of financial emergency. With both LLCs and S corps, the company becomes its own entity, which means that individual owners can no longer be held accountable for the business's debts or legal missteps. Note that this protection ends in the event of criminal or intentionally misleading activity.
Operational requirements: different
There are some aspects of running an S corp that make operations much more intensive from an organizational standpoint. S corps are required to hold shareholder and ownership meetings, and document many of their internal operations. LLCs are free from a lot of this responsibility. Smaller LLCs can typically bypass nearly all of these formal processes.
Ownership structures: different
S corps are governed by regulations that provide for stricter ownership requirements. All owners of an S corp must be US citizens. Also, ownership of S corps is restricted to individuals. This means that trusts and other business entities cannot be part of an S corp’s ownership structure. LLCs can be owned by both subsidiaries and interested foreign parties. S corps also have a strict limit of 100 owners. LLCs do not have a limit, although LLCs of that size are quite rare.
Registered agents: similar
Both LLCs and S corps require their owners or registered agents to file a fair amount of annual paperwork. The registered agent is required to be available during all normal business hours (8:00am to 5:00pm, Monday through Friday).
Management structures: different
LLCs have a much less formal management structure in which owners can act as “managing members”. S corps are required to list officers and directors in order to create a defined hierarchical management structure.
Perpetuity: different
Certain events, such as the death or retirement of an LLC member, can force an LLC to dissolve. This issue can usually be rectified quickly and easily. This isn’t the case for an S corp as it’s considered a perpetual entity. LLCs also are often required to form a dissolution date on filing, but this is more of a formality than anything else. As long as your organization is in good standing, you won’t have any problem re-filing without much hassle.
Taxes: both similar and different
LLCs and S corps are also very similar from a tax standpoint; neither pays taxes on a corporate level. All of the company’s income tax responsibilities are imposed on each of the owners when they pay and report their individual income taxes. This is typically referred to as a “pass through” tax structure.
There are some differences when it comes to self-employment taxes. These taxes are only applicable to members of an LLC and not owners of an S corp. Be sure to check with a certified tax accountant to see if this will noticeably affect on your after tax earnings.
“Selling” your business: different
If your goal is to develop your business and then sell it later for a lucrative payout, an LLC is probably not your ideal corporate structure. This is because ownership interest in an LLC is non-transferable without strict member approval. This isn’t true for S corps though. As long as IRS regulations are followed, S corp owners are free to sell their portion of the company at any time, without any approval.
Swyft can help!
As you can see, there are tons of variables to take into account when deciding which corporate structure is ideal for your business.One of our knowledgable representatives can talk with you today!