5 Things to Consider When Choosing Between LLC and S-Corporation
Starting a Business: A New Turning Point in Life3 min read
Starting a business is an exciting turning point in your life, as it requires quite a bit of planning and foresight on your part. It’s essential that you make an informed decision when establishing the form of business entity you will be running. To simplify the process, here are five of the major points to consider when choosing between a Limited Liability Company (LLC) and a Subchapter S Corporation (S Corp).
LLC vs. S Corp: What is the Difference?
The two major distinctions between an LLC and an S corp are that a) LLCs are taxed differently than S corps and b) only the latter can issue stock. A LLC offers unlimited liability protection to its owners, but profits and losses must be reported by individual owners on their personal income taxes. On the other hand, profits and losses of an S corp are reported on the business's tax return, so individual owners come out with tax-free distributions offered by other flow-through entities, such as LLCs or partnerships. In addition, you must meet certain requirements and get shareholder approval if you’d like to issue stock to members of your LLC.
How Can Local Regulation Impact Your Choice?
When making a decision between a LLC and S corp, it is important to consider your state’s regulations around the formation and operation of these entities. While some states don’t require businesses to file any special documents for incorporation, others require somewhat complex paperwork. For instance, the State of Illinois requires LLCs to file a Certificate of Formation, which specifies the LLC’s name, purpose, and other details about the business. A certificate of formation for an S corp must include the company’s name, jurisdiction of formation, registered agent and office address, among other items. In either situation, you may need the help of a qualified attorney or other professional to ensure your documents are properly filed and that your desired S corp or LLC formation remains valid for state regulations.
What are the Benefits of Expedited Formation?
Forming a LLC can take a while because it requires filing of the mandatory paperwork, which may take several weeks or even months. The S corporation formation process can take longer because of the extra paperwork needed, including the filing of articles of incorporation and a statement of qualification. However, if you are looking for a way to have your business up and running as soon as possible, you can take advantage of a variety of services that offer expedited formation. These services allow you to quickly form a LLC or S corp and have everything filed with the state in as little as two days in some cases.
What is the Difference in Corporate Duties?
In general, LLCs are less formal entities than S corporations and require fewer corporate formalities to remain valid. For instance, the former does not have a board of directors, so no minutes of meetings are necessary. On the other hand, S corporations must abide by the formalities of a corporate structure, which include documenting all meetings, maintaining corporate records, and having a board of directors that approves certain important decisions.
What is the Difference in Ongoing Responsibilities?
LLCs are typically required to file an annual report or form with the state in which they’re formed. On the other hand, S corporations are required to file a federal and state tax return, pay estimated taxes, and provide employee benefits such as workers’ compensation insurance and unemployment insurance. LLCs can also obtain employee benefits, but may not get the same level of tax preference as an S corp.
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