Congratulations! You have finally decided to start your own business.
Or maybe you have been operating as a sole proprietor and have decided it is time to protect your personal assets from those involved with your growing business.
You now face the choice of whether to structure your business as an S corporation (S corp), or a limited liability corporation (LLC).
These two organizational structures have several similarities and difference, as seen below. Make an informed decision.
| S-Corp | LLC | |
|---|---|---|
| Terminology | Owner referred to as ‘shareholder’ in the S Corp | Owner referred to as ‘interest owner or member’ of the LLC |
| Corporate Formalities | Required to hold an annual meeting of S Corp shareholders | No annual meeting required |
| Creditor Protection | Judgment creditor of a shareholder in an S Corp can foreclose on the shareholder’s S Corp shares and take ownership of those shares. | Heightened creditor protection. Charging order requires the LLC to make cash or property distributions to the judgment creditor. |
| No. of Shareholders | Max. 100 owners | Unlimited number of owners |
| Types of Shareholders | Other entities such as LLC, another S Corp or a C Corp cannot own shares in an S Corp. Only specific types of trusts can own shares in an S Corp. | No restrictions on who can be an owner |
| Allocation of Profits and Losses | Shareholders receive profits and losses based on their percentage of ownership | Profits and losses can be allocated on any basis |
| Self-Employment Taxes | Tax advantage provided. Owner can receive compensation in their role as employee. Only this is subject to FICA and Medicare taxes. Remaining income to the owner in their capacity as a shareholder, is treated as a dividend and taxed as ordinary income, but is not subject to payroll taxes. | No tax advantage provided |
Setting up your business in a form that will most benefit you can be a tricky decision to navigate. Contact us if you need more guidance on what structure is best suited for your needs.
