Need a new Corporation? Differences between LLC / Corp / S-Corp
If you’re starting a new business, then you’ll need to figure out what type of business entity your company will be. You’ll need to do this in order to protect yourself financially as well as to protect the company. There are three main options to choose from when deciding what type of business you want your organization to be – an LLC (Limited Liability Company), a Corporation or an S-Corp. It’s generally a good idea to speak to a professional attorney or accountant about your specific needs to determine which option is best for you. The following are the main differences between the three types of business entities that you should know:
A standard corporation is also known as a C-corporation. It designates your company as a separate legal entity that is owned by shareholders. The way that corporate structure works is that it will limit the shareholder’s (owners) personal liability for any business debts incurred by the company to the amount that was invested by the shareholder. Forming a corporation isn’t too difficult – you’ll just need to file incorporation documents with the state as well as pay the required filing fees.
By incorporating your business, you’ll allow for flexible profit-sharing among the shareholders or owners. This flexibility will make it easier to spread business earnings between your corporation and the shareholders for tax planning purposes. It’s a good option if you need venture capital for financing, but will still allow you to easily sell your business if you wish to do so. Additionally, you’ll be able to provide stock options to your employees as a corporation.
An S-corporation is similar to a C-corporation with the exception that you will have a special tax status with the IRS. The formation process is the same as a regular corporation. However, because of the special tax status, you won’t have to deal with the double-taxation that can happen with the income of a C-corporation. You’ll need to file a corporate income tax return, but no tax will have to be paid at the corporate level. Business profits and losses will be passed through to the shareholders instead, where they will then be reported on individual tax returns. Whatever tax is due is paid by individual shareholders at their individual tax rates.
An S-corporation is a good option if you want the main benefits of a regular corporation but would prefer the pass-through taxation element, which can help you minimize social security and medicare taxes by setting salaries for your employees and owners. It’s worth nothing that while C-corporations can have an unlimited number of shareholders, S-corporations are limited to 100, all of which must be U.S. citizens.
An LLC will provide you with the limited liability protection of both C and S-corporations along with the pass-through taxation of an S-corporation. LLCs tend to have fewer obligations than corporations. Choosing an LLC is a good idea if you are the owner of a startup and are expecting losses for at least two years since you can pass those losses through to the owners. LLCs also provide flexible accounting methods as well as more management flexibility than corporations. LLCs also have less ongoing formalities. For example, annual meetings between directors and shareholders that are required by corporations are not required by LLCs. Last but not least, there’s more flexibility in how you share profits among the owners of an LLC.
These are the differences between the different business entities you can choose for your company. For additional advice concerning your small business, be sure to contact us at Valezar & Associates today.