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What’s The Difference Between LLC vs. S Corp vs. Corporation? One difference is an LLC, and a Corporation is business entities, while an S Corp is not a business entity, an S Corp refers to the way a business has chosen to be taxed.
It’s essential to try and find what business structure works for your company. That being said, figuring out things like taxation, liability, and other factors will end up pushing you to one option or the other. You do need to study all the options, the best way that you can because the last thing you want is to deal with any problem!
4 QUESTIONS And 4 OPTIONS
- Will you have personal liability for this business?
- How would you want the profits to be handled and taxed?
- Is this option easy to set up and stay in compliance with the rules?
- How will this affect the company’s ability to raise money?
Because of that, there are three main options here. You have LLC, C Corporation and the S Corporation. Each one of them comes with specific features. If you don’t want to form one of these three business entities, there is the option of “sole proprietor,” which is the most simple form of business and offers the least amount of protection.
Therefore, we will focus on the main three options.
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LLC vs. S Corp vs. Corporation FAQs
What Is An LLC, Limited Liability Company?
Also known as an LLC, the Limited Liability Company is one of the most common business entities. What makes the LLC stand out is that it delivers much flexibility regarding the way you run your business. If someone wants to sue you, in many cases, they would have to sue the LLC, but not always. According to the website Nolo.com
LLC owners can be held personally liable if they: personally and directly injure someone during the course of business due to their negligence, intentionally do something fraudulent, illegal, or reckless during the course of business that causes harm to the company or to someone else…” and Nolo.com adds, “LLCs and their owners should always have liability insurance
The LLC is not a corporation. You don’t need to have a board of directors. However, at the same time, you do have corporate characteristics, and you have to consider those if you want to.
Upon creating an LLC, you get to create a separate business entity. It’s the company that can get sued here, and not the founding members. Again, that doesn’t mean this is a free ticket. Some restrictions come with the LLC.
For example, there is a liability if the employers or founders are injuring another person. The same thing happens if they guarantee lines of credit with the clear idea of defaulting. A similar situation occurs when they are failing to deposit tax money from employees, if they are taking illegal or fraudulent actions that may harm the LLC or if they are failing to treat the LLC as the right business identity that it is. Some of these things tend to happen, which is why you have to study and adjust or adapt ideas the best way that you can!
The exciting thing is that you can have a single-member LLC in most states if you want to. Which means there’s no need to partner up with someone if you don’t want to. This is a better option when compared to a sole proprietorship, so try to keep that in mind. Your personal assets are protected, which is a perfect thing for any investor.
In case you want to have partners, you want to make sure that everything is handled via the Operating Agreement. This is where you can see how the business runs, what responsibilities are in place, and so on. Even if you trust that person with your life, having that agreement will help a lot. You never know how things like these will twist and turn, so you might as well want to make some changes here and there to gain the results that you expect.
What Is Better For Taxes: LLC vs. S Corp?
LLC taxes are offering you corporate veil protection, which is an excellent thing. This is nice because you only get to pay tax for the money that you take out of your LLC. However, the LLC will be treated as an S or C corporation from a tax standpoint. This can help you immensely, and it can bring in front of some nifty results all the time due to that. It just comes down to knowing how and when to handle all these things adequately, and the results will be more than okay. Make sure that you talk with your accountant, to be safe.
How To Maintain The LLC Status?
Keeping the limited liability of the LLC is an excellent idea. Transparency is key here, which is why you need to represent your business the right way, retain a sense of responsibility and fairness as well.
It would help if you also had enough capital to keep the LLC afloat instead of racking up expenses. The LLC financials should never be mixed with the personal income of the founders, and that can be a problem as you might imagine.
From a management standpoint, you need to have an operating agreement. Otherwise, the LLC will be subjected to the default state rules, and those are not as good as the Operating Agreement will be in the end.
What Are The Major Advantages of an LLC?
If you’re an entrepreneur, then one of the significant advantages is that you have a much better taxation system and flexibility here. You also have personal asset protection. You can deduct the usual business expenses, and that means you can ease the tax burden a little bit. You can also create an LLC anywhere in the country, and the registration process is rather simple too, which is a good thing.
The starting costs are low, and the fees are not high in most states. The members can also feel free to distribute profits the way they want; of course, they still have to stick to the federal laws to make sure that it’s all good.
As you can see, having an LLC offers tremendous advantages, which is why you may want to keep that in mind. The thing to consider is that an LLC will help you pursue your dreams as an entrepreneur, and it can give you the utmost potential. It’s going to be quite the challenge, but then again, it will be well worth the effort if you do it right!
Is An LLC The Best Choice For Businesses?
That depends on multiple factors. However, the thing to keep in mind is that the LLC will give you liability protection. You also have a pretty good way to deal with taxes, so try to consider that as much as you can.
Maybe the best thing about having a C Corporation is that it allows you to earn money from the public, and that makes a whole lot of a difference. However, if you don’t raise money, opting for an LLC is always an excellent idea as you get better tax flexibility and liability protection, so keep that in mind.
The C Corporation treats every owner and the business separately when it comes to liability. You will have that tremendous corporate veil when it comes to protecting any personal assets, so try to keep that in mind. As we said, if you want investors, you want to make sure that you use a C Corporation. It’s very flexible when it comes to owners, so try to consider that.
C Corporation Taxes
These taxes will need more paperwork that you have to go through. That being said, the income is taxed at the corporate rates, up to 35%. The income paid to the shareholders as a salary is taxed once again at the recipient as a personal income tax.
The same thing happens to the dividends for shareholders. In case the corporation has restrictions, it can be treated as an S Corporation in case you want to avoid things like double taxation.
C Corporation and Your Partners
There are times when partners want to leave your business. It can be hard to operate without any harm or hassle. That’s why you need to have an excellent partnership agreement here. If there are any problems, that agreement will outline what you have to do, so try to consider that if you can.
Sure, some people will say not having a written agreement is okay, but that’s not the case. You want to have some protection, as there are times when people want out!
Having a Board and Ownership
The C Corporation has a board of directors and shareholders. The board of directors will choose who runs the company. As a result, the more investors you are taking, the more control you give up. Moreover, if the board doesn’t like you in the company anymore, you can get kicked out in the end
Is a C Corporation Right For You?
The LLC option is better most of the time, as you get pretty much the same benefits, yet the flexibility is a lot more. The C Corporation option is better if you want to raise much money from investors. It can end up being more expensive in the long run, not to mention that the more investors you have, the less control you will have over your business.
You can see the S Corporation as being a mix of the C Corporation and an LLC. You will have this as a pass-through tax entity, and in its case, the business owners can choose to be an S corporation from the IRS standpoint.
This will allow C Corporations to avoid things such as double taxation. People used S Corporations to avoid double taxation. The LLC option is better nowadays just because it’s more straightforward and more flexible, something that can help you immensely if you do it right!
S Corporation Taxes and Shareholders
When it comes to taxes, the S Corporation is a C Corporation that wants to avoid double taxation. That being said, you will need to have a domestic operation. It would help if you also had allowable shareholders.
The S Corporation is not allowed to have more than 100 shareholders, and you can also have only a single class in stock if you can. If you want to be treated as an S corporation, you need to set up an LLC or C corporation, and then you will file the 2553 form at the IRS.