5 Things to Consider when Choosing Between an LLC and a S Corp
Deciding Between LLC and S Corp: Making the Right Choice for Your Business2 min read
Running a business can be complex, and one of the biggest decisions you’ll need to make is whether to organize your business as an LLC or a S Corp. It’s important to understand the differences between these two business types, as the structure you choose can have a major impact on the taxation and protection of your assets. If you live in Los Angeles and need guidance on the best decision for your business, it’s best to work with local business attorneys who are well-versed in California’s particular regulations.
LLCs (Limited Liability Companies) and S Corps (S-type Corporations) both have distinct benefits and drawbacks that are important to consider. Here are five of the most important things to think about when deciding between the two structures.
Availability
Since LLCs are state-registered entities, they are not available for business owners everywhere. LLCs are generally the preferred form of organization in states like California and Delaware, but some states don't provide the same legal and tax benefits and may not even recognize it as a legal business type. S Corps, on the other hand, are federally recognized, so they are available in all 50 states.
profits and Losses
Another major difference to be aware of is how LLCs and S Corps are taxed. LLCs are taxed as a “pass-through” entity, meaning that the profits and losses are passed through to the owners and reported on their individual tax returns. In contrast, S Corps are taxed as a corporation, and the profits are subject to “double taxation” - once at the corporate level and then at the individual level.
Ownership
Another thing to consider when choosing between an LLC and a S Corp is the ownership structure. LLCs can have any number of owners (or members), and these owners can be individuals, corporations, non-profits, or even foreign entities. S Corps, on the other hand, are limited to domestic individuals and few other types of entities, and the total number of shareholders is also limited.
Liability Protection
LLCs and S Corps both offer limited liability protection, meaning that in the event of a lawsuit, creditors cannot pursue the company’s owners to satisfy a debt. An important distinction, however, is that S Corps offer additional protection from certain types of business debts, while LLCs do not.
Legal Requirements
LLCs and S Corps both have their own set of legal requirements that must be met to ensure the company’s continued operation. LLCs are typically subject to fewer regulations than S Corps, but both business entities must abide by state laws.
Choosing between an LLC and a S Corp can be a complicated decision, and it’s not one to be taken lightly. Consulting with an experienced business attorney in your state is often the best way to make sure that you make the best choice for your business. Los Angeles residents, in particular, should consider UpCounsel for access to high quality attorneys on demand. UpCounsel’s network of experienced lawyers span multiple industries and fields, and their profiles display client ratings and reviews of recent work. UpCounsel is a great resource for businesses of all sizes looking for legal counsel who understand local regulations.
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