While the first business structure many sole proprietors think of is the corporation, many simply aren’t aware of the benefits that the Limited Liability Company provides.
While both the LLC and the S Corp (the most common corporation structure for small businesses) protect your personal assets, offer tax flexibility, and make it easier to raise capital, there are a few ways LLCs differ.
Number and Type of Owners
While S corps must be owned by individuals (or trusts) that are U.S. citizens or residents, and there must not be more than 100 shareholders, LLCs have fewer restrictions on ownership. LLCs may be owned by other LLCs or corporations and the owners don’t need to be U.S. citizens or residents. There may be an unlimited number of owners in an LLC.
If you plan on having many shareholders or owners, the LLC wins out as the best business structure for you.
Tax Treatment and Profit Distribution
One of the disadvantages of the S corporation is that it doesn’t allow for flexible distribution of profits and losses like an LLC does. Instead, dividends are paid to S corp shareholders in proportion to their ownership. LLCs, on the other hand, may follow the IRS’s special allocation rules to agree to allocations of profits and losses that vary from ownership interests.
So if you want to allow dividends to some owners or shareholders that doesn’t match up with the percent of the company they own, you can do that with an LLC.
S corps require hoops to jump through, such as setting up a Board of Directors and holding Board meetings. LLCs don’t. However, note that you’ll be responsible for creating and filing an Operating Agreement that governs how the LLC will be operated.
If you’re looking for simplicity and minimum paperwork, LLCs fit the bill.
After Filing Your LLC
If you’re just starting a business, you’ll need to take care of other important paperwork, permits, and tasks. If you’ve been operating as a sole proprietor, not a lot changes, but you’ll need to stay on top of form deadlines to remain compliant.
You can even go one step further and then incorporate as an S corp on top of your LLC. If your payroll taxes are high, this is a strategy worth considering.
Whether you choose the LLC or corporation for your business structure, it’s simply important that you choose one. After all, your personal assets and peace of mind are important, and choosing the right business structure can help.