The choice of business entity is arguably the most significant choice a new business has to make. It will establish the legal, tax, and equity structure of the business and how the owners interact and will be compensated.
The distinction between Sole Proprietorships, General Partnerships and C Corporations is fairly clear. However, the choice between S Corporations (S-Corps) and Limited Liability Companies (LLCs) can be a very difficult one. This article will compare and contrast LLCs and S Corps in several important respects in order to help you make a decision as to which form is best for your company.
- Limited personal liability. Perhaps the most fundamental reason business owners form LLCs or S-corps is to protect their personal assets from business creditors or other liabilities arising out of the operation of the business. Both of these entity types can accomplish this crucial goal, giving owners much needed peace of mind. However, that protection can be lost if the business owners conduct their affairs in such a way as to render the company a mere “alter ego” of its owners or if they engage in fraudulent conduct.
- Ease of operation. One of the appealing things about an LLC is that, as a general rule, fewer corporate formalities are required than in S-corps and certainly fewer than in regular corporations, or C-Corps as they are sometimes known. As noted, however, failure to treat the LLC as a distinct entity by commingling funds, undercapitalizing the company, failing to hold meetings, etc. can result in the loss of that all-important personal liability protection.
- Ownership restrictions. Almost any entity can be a member of an LLC. This is not the case for an S-Corp; only individuals and certain qualified trusts can own shares. In addition, non-resident aliens cannot be shareholders and an S- Corporation cannot have more than 100 shareholders. For this purpose, a husband and wife count as one shareholder.
- Both LLCs and S-Corps are “pass-through” entities for tax purposes, which means business profits pass through the business entity and get taxed as the personal income of the owners. If you run a single-owner LLC, you are taxed like a sole proprietorship, which means you can simply attach a Schedule C form to your personal tax return. If your LLC has several owners, you can choose to be taxed as a corporation or a partnership. In an S-Corp, the corporation’s income is reported on the shareholders’ personal income taxes, based on their percentage of shares owned, regardless if they received distributions of the corporation’s income.
There are numerous other nuances and distinctions regarding ownership, management, and operation of both LLCs and S-corps, and there are other types of entities available as well, including general partnerships, limited partnerships, and specialized partnerships for the provision of professional services. Yee Law Group, PC’s business lawyers understand that every business is different and that the goals and concerns of every business owner are unique. We work closely with our clients to evaluate their specific situation and determine which business structure will best set them up for success and growth.
Yee Law Group, PC, L.L.P.: Sacramento/Roseville Business Attorneys
Your business is our business. We partner with our business clients to provide them counsel they can rely on so they can focus on growing their business. The business world is fraught with challenges; your Roseville business attorney at Yee Law Group, PC LLP is ready to face those challenges with you head-on. If your business needs reliable, accessible, and personalized counsel, reach out to us at (916) 599-7297. We welcome the opportunity to help.
This article has been prepared by Yee Law Group, PC, PC for informational purposes only and does not, and is not intended to, constitute legal advice. The information is not provided in the course of an attorney-client relationship and is not intended to substitute for legal advice from an attorney licensed in your jurisdiction.