Should I Start an S-Corp or an LLC? What's the Difference?

Should I start an S-Corp or an LLC?  What's the Difference?

When starting your new business enterprise, picking the business structure at the outset is critical.  Both the S-Corp and LLC offer many of the same general concepts, the most important being the separation and protection of business assets from personal assets.  Here are some of the main pros and cons of both LLCs and S-Corps:

LLC Pros                                                          

• Personal liability protection                            

• No double tax                                                

• Easier to operate than an S-Corp                 

• Flexible business structure

LLC Cons

• Must file an annual report

• Must file company tax return every year

• Venture capitalists will only fund corporations, not LLCs. 

LLCs provide owners liability protection, meaning that owners are not personally liable for any company related lawsuits or debts.  LLCs allow the company's income or losses to reported on the owner's personal taxes, which ensures that profits pass through the business and is only reported once on the owner's tax return.  LLCs are typically simpler to establish than their counterpart S-Corp, as S-Corps require annual minutes and the election of officers, directors and board meetings.  LLCs are also much more flexible when it comes to paying their members (owners).  Different member owners can be paid different amounts.

S-Corp Pros                                                     

• Personal liability protection                            

• Allows pass-through on personal taxes        

• Pays dividends                                             

• Status and credibility of Corp.                      

S-Corp Cons

• S-Corps can incur more fees than an LLC

• More guidelines most be followed, like annual minutes

• Less payment flexibility

• Owners have less control

An S-Corp, unlike a C-Corp, does not pay taxes at the corporate level.  Instead, S-Corp allows an income pass through so owners can report the tax on their personal taxes.  S-Corps can also pay dividends, which can be a great way to motivate and entice employees to work there. 

S-Corps also are more archaic and cumbersome than LLCs in how they are established and run.  An S-Corp requires the filing of annual minutes, must elect a Board of Directors, have annual board meetings and issue shares of stock.

So which entity is better then, an LLC or an S-Corp?

Generally speaking, the smaller, simpler and more personally managed the business is, the more appropriate the LLC structure would be.  If your business is bigger and more complex, an S-Corp likely would be more appropriate.  LLCs are easier and less expensive to set up and simpler to maintain and remain compliant.  S-Corps are better for companies looking for more outside financing or if it will be issuing stock.