Which structure LLC or S-Corp?

I happen to get this question quite often. Later on, I will definitely expand on the rest of the structures more in detail. Today, wanted to focus on the two that in my experience have been the most common. With a few business structures to choose from, what are the comparisons between these two and which one is beneficial to you and your business. Now let's be clear, one is not better then the other, it is just a matter of preference and what you feel is best for your business.

“Now let's be clear, one is not better then the other, it is just a matter of preference and what you feel is best for your business.”

In order to compare both of these structures, let us go into some differences between both.

How would these 2 structures be defined:

LLC - Also known as Limited Liability Company is one of the most common ones that people

go for. Reason for that is that this business structure provides additional benefits that of a sole proprietorship which is one owner and partnership which is for multiple owners. In addition, and the most common reason, it protects the owners personal assets which is where limited liability part comes in just like a corporation. This structure allows for more flexibility on how you run and operate your business and in comparison to an S-Corp it does not require a board of directors.

S-Corp - This structure adds protections to the owner's personal assets with limited liability. In addition, having this structure allows each individual shareholder to report the businesses profit and loss in their personal tax return. These added benefits, offer tax advantages for yourself and your business by the IRS. An S-Corp is better for small corporations.

Now that we have defined what each structure is. Let's dive into some of the comparisons.

Number of Owner's, Shareholders or Members

LLC - No Limit. Commonly referred to as "members." Also, LLCs may be owned by any other type of corporate entity. LLC faces less regulation in regards to the formation of subsidiaries. These "members" may be U.S. citizens, non-U.S. citizens, and non-U.S. residents.

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S-Corp - 100 owner's which are referred to in this company structure as "shareholders." Cannot be owned by individuals who are not U.S. citizens or permanent residents. Also, S corporation cannot be owned by any other corporate entity which includes ownership by other S corporations, C corporations, LLCs, business partnerships, or sole proprietorships.

Protection & Taxation

LLC - With a Limited Liability Company it is in the name, which means that you are not personally hooked for any business liabilities. In this structure however, you are taxed once or twice depending on your specific company. You have the choice to minimize your taxes. LLCs avoid the "double taxation" by passing all company income through to the tax returns of the individual owners.

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S-Corp - Similarly to an LLC, with an S-Corp you are also not liable for any business liabilities. However, the difference in this structure, is that you are only taxed once instead of twice. The shareholders pay on the profits they receive which is split among owner's depending on the agreement of what each receives.

Necessary to open each structure

LLC - State regulated and Articles of Organization and required tax numbers including IRS EIN (Employer Identification Number). Added documents could be needed depending on your business and you should also include an operating agreement.

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S-Corp - State regulated. Need Articles of incorporations, bylaws and tax numbers including IRS EIN (Employer Identification Number). Added documents could be needed depending on your business.

Is transfer of ownership allowed?

The answer is Yes for both structures.

Things to consider

LLC - In order to stay in compliance, there are ongoing filings and fees depending on your business. Also, if you do business globally, an LLC in certain countries is not recognized where it is instead considered a corporation.

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S-Corp - Must have a board of directors. Also, just as an LLC, there are things to consider to stay in compliance. Further, must have annual shareholder meetings, keep record of meeting minutes and adopt corporate bylaws. In addition, there are extensive regulations in regards to issuing stock shares.

Can my company go public?

LLC - Can't go public ever as an LLC

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S-Corp - Yes, however consideration of switching to a C- corp should be considered if going public depending on your business.

Should I have a business bank account?

Yes, as a rule of thumb, you should always separate business with personal. Open a business bank account, deposit money into it and start paying your business expenses through your business account.

There are absolutely more things to consider when determining if you should open an LLC or an S-corp. However, there is no wrong or right answer, it all comes down to preference. Always speak with a professional that can explain to your more in detail on how the structure considered will affect your specific business. Each one can be tailored differently to benefit you the most.

As always, sending positive vibes your way 🙏

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