Business structure is critical to a company. Entrepreneurs planning to start a new business must choose wisely, understanding each type’s implications. Two common types are the limited liability company and corporation, but there are also two types of corporation – C-corporations and S-corporations. When considering what type of business entity, you might consider whether to choose an LLC or an S-Corporation.
But it’s important to understand the differences between an LLC and an S-corporation – and how each fits into your goals.
Basic Differences Between Business Entities
There are four types of business entity from which to choose:
- Sole Proprietorship,
- Partnership (general or limited),
- Limited Liability Company (LLC), and
- Corporation (C or S).
The primary factors that separate these entities are ownership, personal liability, and taxation. Consider how these factors connect with your goals when deciding whether to operate an LLC or an S-corporation.
Forming the Company Is Different
In Florida, a new LLC must file Articles of Organization and pay a filing fee. Then the LLC must file an annual report and pay a fee to the Florida Department of State to continue as an active organization.
Florida corporations also start with filing documents with the Florida Division of Corporations. However, they file Articles of Incorporation instead of Articles of Organization. The new corporation must also designate a registered agent to accept service on behalf of the corporation. There are also other requirements relating to officers, the number of initial shares, and the corporation’s name.
But how does the corporation become an ‘S-corporation?’
Choosing the S-Corporation Election
For this, we look to the Internal Revenue Service (IRS).
An S-corporation is simply a corporation that elected to be taxed differently. Corporations are subject to what is called double taxation. The company passes profits to shareholders through dividends. The corporation pays taxes on its profits, but the shareholders do, too.
S-corporations pass their profits (as well as losses, deductions, and credits) to their shareholders. Instead of the corporation and shareholders both paying taxes on profits, only the shareholders are assessed taxes. And taxes are paid at personal income rates, not corporate rates.
Ownership of an LLC vs. an S-Corporation
An LLC is owned by one or more individuals. Income from the company passes to the owners.
Corporations are owned by a number of shareholders. They might start with two or three shareholders but then increase the number of people who own shares. The same is true of S-corporations.
Personal Liability Between an LLC or an S-Corporation
Either an LLC or an S-corporation offers its owners a level of personal liability protection. This means that their personal assets are protected from the company’s obligations. However, creditors might be able to take assets from single-member LLCs.
LLCs are separate legal entities from their members. Generally, the LLC owners’ personal assets are protected from LLC obligations. In some cases, single-member LLC owners might be vulnerable to creditors.
Shareholders of a corporation are not usually at risk for corporate obligations. Since S-corporations are just corporations that elected to be taxed differently, their members should receive the same personal liability protection.
Taxation Decisions Between an LLC and an S-corporation
As mentioned above, corporations are subject to double taxation. A corporation pays income taxes at the corporate level, and then shareholders pay on dividends/income received from the corporation. Of course, choosing S-corporation tax status changes this so that shareholders report dividends as income on their returns.
Generally, LLCs are considered “pass-through” organizations. This means that their profits pass to the owners or members, who then declare the income (and losses) on their personal income tax returns.
However, LLC members are considered self-employed business owners. As such, they usually are required to pay self-employment taxes. In some cases, LLCs can choose to be taxed as an S-corporation. This can help the LLC member avoid having to pay self-employment tax.
Only You Can Decide Whether Your New Business Will Be an LLC or an S-Corporation.
But we can help take some of the mystery out of the decision. Our experienced business lawyers can review your goals and plans and then discuss your options.
Attorney Richard Sierra at the Florida Small Business Center assists clients like you with business and litigation matters. As always, Our Goal Is to Help You Succeed™. For an appointment, you may call us at 1-866-842-5202 or use the contact form on our website. We represent clients throughout the State of Florida, including Coral Springs, Coconut Creek, Boca Raton, Delray Beach, Pompano Beach, Sunrise, Fort Lauderdale, Miami, West Palm Beach, Jupiter, Deerfield Beach, Stuart, Port St. Lucie, Orlando, Naples, Fort Myers, Sarasota, Tampa, and surrounding communities.