As your business grows, you will get to a point where you have to choose your path to incorporation. LLCs, S-Corps, C-Corps- the legal jargon can get confusing, so we took the time to break it down for you.
An LLC is a limited liability company. What this means is that it has the limited liability of a corporation, but your taxes are treated as if it is a partnership.
There are rules that you must follow to form an LLC. The first step is to pick a business name. Sounds simple enough, right? Well, not so fast. It has to be different from any other LLC in the state. The name also must include “LLC” in it, and the name cannot contain any words restricted by the state.
The next step is to file documents of the organization. This sounds more complicated than it is. It is just putting your legal business information on file. An important next step is to put together an operating agreement. Even if your state does not require this, it is never a bad thing to have everything down in writing.
On the taxes side, one of the perks of having an LLC is that it is not taxed as a separate entity. You are also protected from business failure, so your business will not affect your personal credit. With an LLC, you are also able to split up profits yourself and the costs and recordkeeping is minimal. Some of the disadvantages are that in some states, if a member leaves, the business is dissolved. From a tax perspective, you will be taxed for self-employment.
Different from an LLC, an S-Corp is a separate entity from the owner and is taxed as such. Since the business is taxed itself, you still have limited liability with S-Corps. To see if you are even eligible, you must go through the IRS. Another option with an S-Corp is to combine it with an LLC.
A perk of registering as an S-Corp is saving on taxes. According to the Small Business Association, “only the wages of the S-Corp shareholder who is an employee are subject to employment tax.” Another perk is the fact that the business is separate means and if a shareholder decides to leave, the business will continue to live on with no further issues. One of the constraints is that the operating laws are stricter than with an LLC.
A C-Corp is what you usually think of when you hear the word corporation- an entirely separate entity from the individuals, and it's taxed as such. It is the most popular version of a corporation, but it is the most expensive to start. It is also the most regulated. The positives of this are that there is unlimited growth, and it can exist forever. There is also no limit to the number of shareholders, and you can deduct things, including business expenses and virtual office packages.
Each of these options presents unique benefits. If you are looking for the most freedom, an LLC is a way to go. For a larger corporation, you cannot beat a C-Corp. For something in the middle, an S-Corp is your best option.