S Corp Vs LLC – Learn the Basic Ownership Structures
Posted On June 22, 2021
Deciding on an ownership structure for your business is really less Hard as extracting your wisdom tooth by yourself. If you file taxes yourself, you are most likely well equipped to do this without a lawyer or an accountant. Bear in mind, you may always choose to convert to another kind of ownership later.
But in case you have got a spouse, which many start-ups do, sole proprietorship is out of the question. For multiple-owner companies, a partnership delivers the ease of creation much like a sole proprietorship and pass-through taxation there is not any tax at the partnership level. However, partners in a partnership are liable for each others’ actions. A limited partnership affords invested capital protection for the limited partners, but the general partner, who manages day-to-day operations of the company, is responsible for all activities. If you work for your company, you are a general partner. Hence, a partnership arrangement still does not supply the limited liability I am seeking.
Limited Liability Company LLC
This brings us to another ownership structure: a limited liability company LLC. An LLC is similar to a soaped-up partnership. It is the pass-through tax advantages of a partnership also, as its title suggests limited liability for its member’s owners of LLCs are called members. The significant difference between an LLC and a partnership is that an LLC is legally recognized as a distinct entity, thus the limited liability protection benefit.
There are two types of corporations: a C Corporation and an S Corporation. A C Corp gives the exact same limited liability protection that LLC offers. Most publicly traded companies have been shaped as C Corporations because this ownership arrangement has been in existence for quite a long time. The regulations governing C companies have matured and therefore well known by many and you can check my review here. Despite its prevalence, a C corporation has its own drawbacks. One that stands out is its dual taxation. In other words, your company is taxed once at the company level and another time when wages are paid for you.
Tired of paying so much tax, the wealthy businessmen came up with the idea of an S Corporation. Someone once said Tax laws are written by the rich for the poor. Indeed. The S Corporation is, as you may have guessed, a C Corporation with the pass-through tax benefit.
Selecting Between LLC and S Corp
Considering both LLC and S Corporation provide the same liability coverage, the choice boils down to several factors to consider:
- Tax implications
- Registration and maintenance costs
- Employees and future ownership changes