LLCs vs S Corps: Your Legal Guide to Knowing the Difference
When deciding on a business entity for your organization, there are several options, including LLCs and S Corps3 min read
When deciding on a business entity for your organization, there are several options, including LLCs and S Corps. Both LLCs and S Corps offer different benefits and legal differences, depending on the company location and other factors. When looking for advice on the topic, it is important to choose counsel that understands the local regulations and laws in New York. UpCounsel provides experienced business counsel for those searching for legal services in the US and is the ideal resource for understanding the differences between an LLC and S Corp.
An LLC and S Corp are different business entities that offer distinct advantages and disadvantages, making it important to understand which business structure is most beneficial for an organization and location. Here’s what to consider when choosing the right path for your business legal entity.
What is an LLC?
A Limited Liability Company (LLC) is a business structure that allows for a company’s members to limit their personal liability for the debts, obligations, and liabilities of the company. An LLC is a hybrid legal structure that offers the advantages of a corporation and a partnership. Of note, LLCs are considered pass-through-entities, which means the profits and losses flow through to the owners, who are known as the “members,” for tax filings.
What is an S Corporation?
An S Corporation (S Corp) is a business entity that is taxed similarly to a limited liability company. It is a separate taxable entity where company profits and losses flow through to the shareholders of the company, unlike a C Corporation, which faces “double taxation.” Similar to an LLC, an S Corp also offers limited
LLC vs. S Corp: Tax and Governance
When deciding between an LLC and S Corp, it’s important to understand the differences in tax benefits and management.
Tax Benefits
By choosing an LLC, the members have the flexibility to decide the way the business is taxed. An LLC can choose to be taxed as a regular corporation, partnership, sole proprietorship, or an S Corp. Other tax benefits for LLC members may include deductions for self-employment taxes. On the other hand, an S Corp offers a variety of tax advantages for shareholders. Unlike C Corporations, any profits and losses of the business can pass through to the personal returns of the shareholders, avoiding the double-taxation of a C Corporation.
Governance
When it comes to governance, LLCs allow for members to completely customize the organizational structure and rules. LLCs require that the members manage the business, with a single member operating alone and multiple members managing together. On the contrary, S Corps require members to adopt corporate governance guidelines established by the Internal Revenue Service. Additionally, the business structure prohibits a single individual from being the sole shareholder and all shareholders must be US citizens in order for the entity to be classified as an S Corp.
LLCs & S Corps: Which Entity is Right for Your Business?
When considering the differences between an LLC and S Corp, it is essential to understand the advantages, disadvantages, and risks of both business structures. Both LLCs and S Corps offer unique benefits by providing limited liability and pass-through tax advantages. Ultimately, choosing the best entity for your business depends on factors such as location, the number of members, and the purpose of the organization. For those based in New York, it is best to work with business counsel who understands the local regulations and offers high-quality legal advice. UpCounsel offers experienced attorneys in the US and provides access to attorneys on demand with the help of its network of lawyers.
No matter the size of the organization, UpCounsel’s attorney network provides businesses of all shapes and sizes with cost-effective legal services. UpCounsel’s online attorney profiles offer clients the ability to preview recent ratings and reviews of attorneys to ensure that your business is getting the best legal advice. Thus, whether you are setting up an LLC or S Corp, considering counsel that specializes in the area is a critical factor in setting up a successful business entity.
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