Frequently Asked Questions Regarding LLC vs S Corp in Dallas
Making a Business Entity Decision: Challenges for the Uninformed3 min read
The decision to form a business entity isn’t always an easy one, especially if you aren’t well-versed in the various legal and tax distinctions between each entity type. One of the most common queries when deciding between a Limited Liability Company (LLC) and an S Corporation (S Corp) comes from readers in Dallas. Business GAAP and legal regulations in Texas are constantly shifting, making it confusing to know which entity type to pursue if your business is based in the area. In this article, we delve into typical questions asked by business owners and entrepreneurs alike to help you decide between an LLC and an S Corp, depending on what’s best for your business needs.
What Is an LLC?
Let’s begin with a refresher: An LLC is a business legal entity formed at the state level to limit the personal liability of its owners — or members — from business debts and obligations. LLCs carry the advantage of pass-through taxation, meaning business profits and losses “pass through” to their owners, instead of being taxed as a corporate entity.
What Is an S Corp?
S Corps are corporations in the eyes of the Internal Revenue Service (IRS), meaning the entity itself pays taxes on its profits instead of the owners. This differs from LLCs, which have pass-through taxation.
LLC vs S Corp: Which Is Better in Texas?
Ultimately, whether you choose an LLC or an S Corp depends on a few factors. Several states across the U.S. have their own LLC filing requirements and restrictions, which can complicate or simplify the decision-making process in certain areas of the country. In Texas, LLCs and S Corps both require a business filing process and a fee with the state, though whether it’s more economical versus another entity type is entirely decision-based.
Advantages of Forming an LLC in Dallas
One of the central benefits of forming an LLC, rather than an S Corp is the lack of formalities. LLCs are less expensive to assume and maintain than corporations, requiring minimal federal and state filings that are typically just once a year. LLCs often require fewer annual state filing fees and documents, and don’t need to worry about adoption of employment policies, managing directors and shareholders, and holding annual meetings.
Advantages of Forming an S Corp in Dallas
In comparison, S Corps carry advantageous tax treatment opportunities like pass-through taxation, meaning the business owner or shareholder does not pay personal or federal income tax on the business’s income. The entity is taxed at the corporate rate along with the shareholders splitting the profits amongst themselves, as outlined on the company’s articles or corporate bylaws. However, due to the formalities required by an S Corp, the corporation must complete general filings such as the adoption of corporate bylaws, annual shareholder meetings, directors, and the issuance of stock certificates.
Should I Consult an Attorney Before Deciding Between an LLC and an S Corp?
If you’re still unclear about which entity type is best for your Dallas-based business needs, consulting an experienced attorney is the best next step. Working with an attorney is especially helpful to determine which type of entity is best for withstanding state-specific GAAP regulations and managing taxation years that span multiple state borders (if applicable to your business operations). UpCounsel is an excellent resource for business owners in Dallas, offering access to a wide network of experienced corporate lawyers with an average of fourteen years of legal experience in business and corporate law.
When it comes to deciding between an LLC and an S Corp, many factors come into play to ensure you’re selecting the best entity for you and your business needs. Consider the cost of fees, the formalities associated with both entity types, and contact an attorney to help you decide. Especially in the United States, the laws differ state-to-state, making it even more crucial to familiarize yourself with the specific regulations and requirements for Texas before adopting any corporate structure.