In today’s world, everyone with access to a Smartphone, tablet or laptop has the tools to not only start, but to develop 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) have become a foundation from which businesses are built.
The common link that many of these entrepreneurs share are 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 in launching their business, one of the most important is choosing which business entity to operate under.
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 Corporation?
A corporation is an entity that is separate and distinct from its owners (shareholders). All type of businesses (such as many large companies that you have bought products from) are corporations.
Pros to Corporations
- Liability: Shareholders enjoy limited liability for the entity’s activities and debits, so long as the 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
Cons to 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
- Taxation: In some instances, there is taxation both at the corporate level and the shareholder level