In today’s world, everyone with access to a Smartphone, tablet or laptop has the tools to start and grow a successful business.
From virtual assistants and freelance web designers to financial professionals, retailers and your best friend who’s trying to create the next hottest trend, the internet (and all of its social media platforms) has become a foundation from which businesses are built.
The common link that many of these entrepreneurs share is that they are part of a community that comprises the economic backbone of this country—the small business owner.
Although small business owners have a laundry list of crucial decisions to make, one of the most important is choosing the most beneficial entity structure for the business.
While there are several options to choose from, the Limited Liability Company (“LLC”) and “S” Corporation (“S” Corp) are among the most common entities selected by small business owners.
What is a Limited Liability Company (LLC)?
Limited Liability Companies are a hybrid between a partnership and a corporation. They typically do not require the same formalities that must be followed by a corporation. Additionally, the LLC combines pass-through taxation while simultaneously offering limited liability to its owners (members).
Pros to LLCs
- Number of members: Unlimited
- Taxation: Pass-through taxation (the LLC is disregarded for tax purposes); Members report profits/losses on individual tax returns (no double taxation);
- Flexibility: No requirement to have a board of directors; generally involve less paperwork/record-keeping than a corporation;
- Liability: Members are not held personally liable for company debts
Cons to LLCs
- Taxation: Profits and losses are reported on each Member’s individual tax return regardless of whether such Member receives distributions
- Credibility: In some instances, such as when a venture capital firm is investing into a company, the LLC may not be the preferred company structure
- Fees: Some states require annual registration fees for an LLC that may exceed the costs for other types of business entities.
What is a "S" Corporation?
A "S" Corporation is an entity that is separate and distinct from its owners (shareholders), however the shareholders pay taxes on the income of the business (pass-through taxation).
Pros to "S" Corporations
- Liability: Shareholders enjoy limited liability for the entity’s activities and debts, so long as corporate formalities are followed
- Credibility: Since corporations can issue stock, they are generally considered more favorable—thereby making it easier to raise capital from investors
- Structure: Clearly defined roles for directors, officers and shareholders
- Taxation: Pass-through taxation to shareholders
Cons to "S" Corporations
- Formality: The Corporation must adhere to certain formalities such as holding regular meetings for the board of directors, keeping minutes of meetings, and maintaining proper corporate records
- Shareholders: Limited number of shareholders
- Taxation: Profit and Loss allocation based on stock ownership