If You’re Starting a Business Should You Use an LLC or S Corp?

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Their are many things to consider when you’re starting a business such as insurance, rent, advertising, payroll and much more. I think that one of the most important decisions to make when starting a business is what type of entity should it be. By that I mean will it be a partnership, sole proprietorship, Corporation or LLC (Limited Liability Company).

Over the past several years I have seen many businesses form a Limited Liability Company over a Corporation.  The LLC has gotten to be a pretty popular way of doing business.  According to Wikipedia a Limited Liability Company is a hybrid business entity that has certain characteristics of a corporation, partnership, or even sole proprietorship (if it has only one owner.) But before you run out and start your business and form an LLC let’s compare it to the S Corp to see which one is right for you.

Their are many similarities between them that I want to go over as well as the differences.

The similarities between them is that both an S Corp and LLC are separate entities that have separate tax returns as well as state mandated formalities such as filing annual reports and paying the necessary fees.
The LLC and S Corp both offer Limited Liability protection. What that means is that if anyone ever sues the business that person can only go after the assets of the business and not the personal assets of the owner such as the car or home.

They are both pass through entities meaning that these entities don’t pay taxes at the business level. This means that any profit or loss is distributed to the owners on their personal tax return. For example if ABC Corp which is an S Corp has a $20,000 Net Profit for the tax year 2016 then ABC Corp does not pay any tax on that $20,000 profit. Instead that $20,000 profit gets distributed to the owners of that corporation and gets taxed on the individual 1040 returns of the owners of ABC Corp.

Some of the differences between an LLC and S Corp are that LLC’s can have an unlimited number of owners called “members” while an S Corp can only no more than 100 owners called “shareholders.” Owners of LLC’s can be non US citizens or residents while S Corps can’t.

There https://buycbdproducts.com also different formalities for both entities. Some of the formalities that an S Corp has that an LLC doesn’t have are holding initial and annual director and shareholder meetings as well as keeping formal minutes of what was said during the meeting with corporate records. S Corporations must also issue stock and have bylaws.
Some of the formalities of an LLC include having an operating agreement as well as issuing membership shares. An LLC also must hold annual meetings which must be documented.

Another major difference between the two is that an S Corporation’s existence never ends but now some states require an LLC to list a dissolution date in the formation documents.  An LLC may have a possibility to also dissolve due to a death or withdrawal of a member.
Before I end this article I also want to inform you about the some of the main differences between an S Corp and a C Corp. Unless you are planning to start the next Microsoft or Facebook I would not recommend you filing a C Corp instead of an S Corp.

The major difference between the two is that c C Corp is a separate entity as opposed to an S Corp which is a pass through entity. This means that you will probably face double taxation. By double taxation I mean that you will pay taxes on the C Corp Return and if you as the owner take dividend from the C Corp you will also have to pay personal tax on dividends or salary drawn from the corporation.

A C Corp does not have any restrictions on ownership while the S Corp can’t have any more than 100 shareholders. If you’re planning to find investors or sell your company then you might be better off with a C Corp.

As I previously stated if you chose to start a Corporation instead of an LLC I would recommend filing for an S Corp instead of a C Corp unless you are planning to take the company public.

6 Replies to “If You’re Starting a Business Should You Use an LLC or S Corp?”

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