If you want to start a company, you will have to choose the type of business entity to start. Some of the most common entities for those starting companies in the United States are LLCs (Limited Liability Companies) and S Corporations Whether You Should Start an LLC or S Corp.
These two options differ in different ways, especially when it comes to their management structures and taxes. However, you might also start a company that operates as both an LLC or S Corp.
Before starting a company, you need to make sure that you understand the differences between these two business entities. This is essential in helping you to decide whether you should start an LLC or an S-Corp.1. Learning More About S-Corps
An S-Corp, also known as S-Subchapter or S-Corporation, is a business entity that allows the IRS (Internal Revenue Service) to tax your business the same way partnerships are taxed. In addition, the regulation ensures that your business avoids corporate-level taxation.
Before starting an S-Corp, you need to start an LLC or S Corp or C corporation. The owners of an S-Corp are called shareholders. All owners are employees in the business. This means that they are supposed to pay themselves a salary, just like any other employee.
All the credits, deductions, losses, and profits taxation in an S-Corp happens at the level of shareholders. This means that the business is not liable for any of those things. S-Corps need between one to one hundred shareholders.
In addition, they are supposed to be registered and located in the United States. You are also required to file taxes with the IRS.2. Learning More About LLCs
Just like S-Corps, you need to learn everything about LLCs before starting one. An LLC can be described as a business entity that ensures that the personal assets of its owners are protected from the business.
For instance, assume that your business is sued by a customer or involved in some legal troubles. In such a situation, the customer cannot go after the assets of the business owners. They can only sue the business, not its owners.
An LLC can be taxed either as an S-Corp or a sole proprietorship. If taxed as an S-Corp, then the owners have to earn a salary. The business will then report the salary paid to its owners as an expense. It should also deduct all payroll taxes.
On the other hand, taxing an LLC the same way sole proprietorships are taxed allows them to act as pass-through entities. This means that all profits are passed from the business to its owners. These profits can be reported on personal tax returns, meaning that they (the business owners) do not need to file corporate taxes.3. Deciding Between an LLC or S Corp
It might make sense to start an LLC when starting a small business compared to an S-Corp. This is because of the freedom offered by LLCs. However, successful entrepreneurs need to understand a couple of things to help them decide between an LLC or S Corp .4. Structure of Management
LLC or S Corp are quite different when it comes to their structures of management. An LLC that is managed by its members operates more like a partnership. On the other hand, it operates like a corporation if it is managed by employees. Its members are not involved in the business decision-making processes.
An S-Corp, on the other hand, has officers and directors. They also have a BOD (Board of Directors) responsible for making all the major decisions and enforcing corporate formalities. The directors are responsible for ensuring that they have officers to manage the operations of the business.5. Taxes
LLC or S Corp , If you start an LLC, you will need to pay your employment taxes such as Medicare and social security taxes to the IRS. As of 2022, you are required to pay 2.9% and 12.4% for Medicare and social security respectively. The income generated by an LLC is taxable.
As discussed above, the owners of an S-Corp earn a salary. This means that the business is supposed to pay all payroll taxes on the salaries. These salaries are classified as business expenses when calculating the business’s taxable income.
Any profits left are then shared among all shareholders. They are classified as dividends. Dividends have low rates when it comes to taxes compared to other forms of income.6. Structure of Shareholders, Stock, and Restrictions
You can have as many members in an LLC as you want. However, you can have a maximum of one hundred shareholders in an S-Corp. In addition, while you can have non-Americans as members in an LLC, you cannot have non-American shareholders in an S-Corp.
LLC or S Corp, If you choose to start an S-Corp, it is also important to note that you cannot start any subsidiaries. With an LLC, you do not have any restrictions when it comes to subsidiaries. In addition, you can only issue a single class of stock with S-Corps. You cannot do this with LLCs.7. Which is Better? LLC or S-Corp
The choice of business entity you take should be dictated by the business you are starting as well the benefits from each one of them. You need to make sure that you understand LLC or S Corp well before choosing any of them.
As you can see above, each of these business entities has its pros and cons, LLC or S Corp, so make sure that you choose one that meets your requirements.
* This article was originally published here