If you plan to start a company, consult an attorney familiar with corporate law to help set up a business entity for operations. Many entrepreneurs choose to structure their businesses as either limited liability companies (LLCs) or S corporations. Both entities help business owners protect personal assets from creditors and bypass paying personal as well as corporate taxes. Although there are similarities between the two types, knowing the differences, as outlined here, will help you decide which to choose.

Limited Liability Companies Enjoy Flexibility

With an LLC, an unlimited number of people can share ownership of the business and divide the profits. Founding partners can put up a small percentage of the startup money to maintain management control. The profit share of other investors can be less than their investment capital. An attorney can draft documents outlining how profit and management authority will be divided. 

Under an LLC structure, business owners also enjoy liability protection, as personal assets won’t be used to pay for company losses or for the settlement of court cases. When filing federal income taxes, the company is considered a partnership or corporation and subjected to pass-through taxation status. This means the company income shows up on each owner’s personal tax return, so the business isn’t taxed. Maintaining an LLC is easier to manage than other entities, as founding partners aren’t obligated to hold annual shareholder meetings, pay state fees, or submit annual reports so government agencies can monitor business activity. 

S Corporations Have More Regulations

To become an S corporation, an existing corporation must file Form 2553, or an S Election, with the IRS. This gives the company a special small-business tax designation, so it is taxed according to Subchapter S of the Internal Revenue Code. Unlike an LLC, an S corporation must file a tax return and can have no more than 100 shareholders. The owners and shareholders are business employees, with taxes coming out of their salaries. Although managers handle day-to-day operations, a board of directors handles corporate matters.

Like an LLC, S corporations have pass-through taxation status. Business income and losses are reported on shareholders’ personal tax returns. This way, federal taxes don’t need to be paid at both the shareholder and corporate levels. Shareholders also have liability protection, so their personal assets won’t be used in lawsuits. Transferring the ownership of an S corporation is a simple process, as you can transfer as much or as little of the interest to another party without triggering an IRS reassessment of how the business is taxed. As corporate business is logged in annual reports that go to government agencies and operations are overseen by a board of directors, starting an S corporation could make your company appear more credible to potential clients.

For help choosing a legal entity for your new business, contact Luke A. Weiland, Attorney at Law. Knowledgeable in business law, the Wisconsin Rapids, WI-based attorney assists entrepreneurs throughout Wood County with legal matters to get their businesses up and running. To schedule a consultation, call (715) 422-6808. Visit the attorney online for an overview of additional practice areas and read client feedback on Facebook.