Getting Started on LLC vs S Corp: A Guide for New York Business Owners
Making the right decision for the future of your New York business requires careful analysis and preparation3 min read
Making the right decision for the future of your New York business requires careful analysis and preparation. When choosing between various business entities, it’s important to take into account both the benefits and drawbacks of each entity and to understand the differences between each one.
Two of the most commonly used business entities are the limited liability company (LLC) and the S corporation (S corp). Both LLCs and S corps offer liability protection and tax benefits, but those benefits come with some advantages and disadvantages. Knowing these details will help New York business owners make the right decision for their business.
What Is an LLC?
As the name suggests, an LLC is a business entity designed to protect its owners from personal liability. LLCs provide owners with limited liability for the obligations of the business, which means that the owners will not be personally responsible for any debts and liabilities incurred by the business.
In terms of structure, an LLC is a hybrid between a corporation and a partnership. LLCs are managed by members, who can be individuals, corporations, or other entities. LLCs are also fairly flexible in terms of tax treatment. They can be taxed as a sole proprietorship, a partnership, or a corporation.
What Is an S Corp?
An S corp, or S corporation, is a corporation that has elected a special tax designation for federal taxation purposes. Like an LLC, an S corp is a business entity that provides owners with liability protection, but it is owned by shareholders and managed by a board of directors.
Unlike LLCs, S corps are only allowed to issue one class of stock and are subject to limitations on the number of shareholders they can have. S corps also require a bit more paperwork than LLCs. For example, S corps must file an annual tax return, while LLCs are not required to do the same.
Advantages and Disadvantages of LLCs
The primary advantage of an LLC is the limited liability protection it offers to its owners. As mentioned, the owners of an LLC are not personally responsible for any debts and liabilities of the business. This means that if the business fails, the owners’ personal assets are not at risk. This is one of the reasons why LLCs are often preferred by startup businesses. LLCs are also relatively easy to set up and maintain.
The primary disadvantage of an LLC is the “double taxation” issue. Under an LLC, profits are taxed first at the corporate level and then again at the personal level when they are distributed to the owners. This can be a significant burden, since it means that the LLC will have to pay taxes twice on its profits. Additionally, LLCs can be more expensive to set up and maintain than other business entities, such as sole proprietorships.
Advantages and Disadvantages of S Corps
The primary advantage of an S corp is the tax benefits it offers to its owners. Because S corps are treated as “pass-through” entities, profits are only taxed once—at the personal level. This means that the S corp itself does not have to pay taxes on its profits. Additionally, S corps offer the same limited liability protection as LLCs.
However, there are several drawbacks to S corps. For one, S corps have more stringent requirements than LLCs in terms of ownership and structure. As mentioned, S corps cannot have more than 100 shareholders and can only issue one class of stock. Furthermore, they are subject to special rules regarding the distribution of profits and losses, which can be especially complex for high-earning S corps. Additionally, setting up and maintaining an S corp can be more costly than setting up and maintaining an LLC.
Which Should You Choose?
When it comes to deciding between an LLC and an S corp, New York business owners should consider their particular needs and objectives. While both LLCs and S corps offer limited liability protection and tax benefits, they have different advantages and drawbacks.
Before making a decision, it can be helpful to consult with a business lawyer who is knowledgeable about both entities and familiar with New York business law. This will ensure you make an informed decision that is best for your business.