There’s a lot that goes into getting a new company off the ground. Although it’s normal for this experience to be quite hectic, it is important to take care of all the basics. That includes choosing a formal structure for your company. Whether a company suddenly takes off or hits hard times, having a formal structure in place is the best way to protect everyone who is involved.
Now that we’ve established why it’s so important to establish a new company as a legal entity, the next question to answer is which structure to choose. The two most popular options are the limited liability company and the S corporation. While the structures of an LLC and S corp share similarities such as income pass-through to owners and limited liability protection, there are some key differences, which we’re going to cover right now:
Limited Liability Company
The basic premise of an LLC is it takes the limited liability features of a corporation and combines them with the tax efficiencies and operational flexibility of a sole proprietorship or general partnership. With an LLC, each member (which is the term used for owner) uses their individual federal tax return to report profits or losses. Another reason new companies may choose this structure is it’s relatively easy to operate and administer. There are also relatively few restrictions in regards to distributing earnings through profit-sharing.
Like an LLC, shareholders in an S corp are taxed at their individual income tax rates. This is because income, losses, deductions and/or credits are passed through the S corporation structure. That being said, there are still significant potential tax advantages to consider, such as only wages paid to owners or employees being subject to FICA tax for Social Security and Medicare. Other net earnings from an S corporation that pass through to shareholders are considered passive income and not subject to SECA tax. In terms of administrative operations and record-keeping, S corporations do require more work than limited liability companies. This structure is also limited to a total of 100 shareholders, all of whom must be individuals or certain trusts (as opposed to partnerships or corporations).
The Bottom Line
If you feel like you now know more about both options but still aren’t sure which one is right for your new company, the good news is you don’t need to answer this question on your own. Donohoo Accounting Services has over two decades of experience helping clients with financial and tax issues. We’ve worked with a wide range of companies, which means we can assess your specific situation and advise you about which structure will benefit your company the most. Contact us now for a free consultation by calling 513-528-3982.
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