LLCs and S-corporations are two types of business structures that might be right for small business owners. Choosing the best business structure for your company’s needs and goals is important, as it can save you a lot of time, money, and hassle later.
Keep reading to find out more about how LLCs and S-corporations stack up, including pros and cons for each and who might want to consider these business structures. You’ll also get a quick look at other business structure options and find out how a business law attorney can help you with business formation and planning.
What Are Some Potential Business Structures?
Possible business structures in Tennessee include:
- Sole proprietorships. Perhaps the easiest type of company to start, sole proprietorships offer benefits including flexibility and reduced administrative costs. However, this type of business can leave you open to liability and credit issues, as there is very little separation between the business owner as a person and the business itself.
- Partnerships. Partnerships occur when two or more people join to launch a business. With a general partnership, the partners have a similar liability exposure as a sole proprietor would, though it does help that it’s divided among more people. The business doesn’t pay taxes; the income is passed through to the partners, who claim it in their individual income tax returns.
- Corporations. Corporations are more complex business structures that create a barrier between the owner as a person and the business as an entity. This can reduce your liability and create some potential tax benefits, though corporations tend to come with expenses and requirements that simpler forms of business don’t.
- Limited Liability Companies. LLCs also create a barrier between the business and the owner as a person, offering some tax and liability protection. As with corporations, LLCs come with some reporting requirements that can increase expenses.
When Should You Choose an S-Corporation or LLC?
If you’re a freelancer with a fairly simple business model and low liability, such as a photographer, graphic designer, or writer, you may want to start with a sole proprietorship. If you’re a husband and wife pair or another small group of people with a simple business model, a partnership can be a fast way to get your business off the ground.
However, if you have a slightly more complex business model, want to separate yourself more from your business, or are working in an industry with a lot of potential liability, an S-corporation or LLC may be the right choice for you.
S-Corporations vs. LLCs: The Major Differences
Deciding between an S-corporation and an LLC may be a bit harder. Familiarizing yourself with the benefits of an LLC and an S-corporation can be a good place to start. You might also want to consider where these two structures differ.
The way the business can be managed differs depending on which structure you pick. An S-corporation follows the structure that’s common for most corporations, with a board of directors that makes the big decisions about the trajectory of the company. Meanwhile, executives or others oversee day-to-day operations. These are either officers elected by the board or employees hired by the board (or the board’s designee).
In contrast, an LLC can be managed directly by its owners. The owners can also choose to hire managers so they don’t have to be involved in the day-to-day operation and decision-making.
The number of owners you can have for the company differs depending on which business type you choose. You can only have up to 100 owners (aka, shareholders) for an S-corporation. With an LLC, you can have unlimited owners. If you may want to scale up your company in the future and bring in more investor-owners, an LLC could be the right choice.
There are other limitations to S-corporation ownership. They must be owned by individual people and not trusts, other corporations, or businesses set up as LLCs or partnerships. That’s in contrast to LLCs, which can be owned by other entities. There are also fewer restrictions on subsidiaries for LLCs.
With an LLC, you can issue stock in various classes. This lets you create different financial payouts or rights for various shareholders. You can’t do that with an S-corporation.
The tax benefits for these two business types are slightly different but comparable when it comes to protections and savings, and the cost of setting up these businesses is within a few hundred dollars of each other on average.
What Type of Business Structure Should You Choose?
Making the choice between an LLC and an S-corporation may be difficult, especially if you don’t have a solid plan for the future of your new company. Working with a business law attorney to plan your business can help you define your goals and business needs. That, in turn, can help you decide which business structure would be best for you.
Before you launch your new business or start working on articles of incorporation, contact Crow Estate Planning & Probate. In addition to helping people protect their legacies and plan for the end of life, we are experienced in business planning and formation. Call our office today to find out how we can help you create a solid foundation for your business dream.