Choosing a business type is a confusing prospect. Two of the most common types of small businesses are S corporations and LLCs (limited liability companies). Attorney Robert Warwick answers questions about these business types to help you make sense of the differences, benefits and drawbacks of each type.
The limited liability company form is created as a state entity, so the information provided here about LLCs is intended to be general and some details may be different for your state. To find out more about how your state treats LLC's, go to your state's secretary of state/business division.
An S corporation pays taxes on a different form from a corporation. An LLC pays taxes as either a sole proprietor (single-member LLC) or partnership (multi-member LLC). There are also differences in self-employment taxes and income taxes for owners in these two entities.
Both S Corporations and LLCs have record keeping requirements, although corporate records are usually more closely scrutinized. Other record keeping requirements, including taxes, are discussed in this article.
Depending on the state where you start your business, an LLC is generally easier to start, with fewer requirements and lower costs. But be sure to check with your state's department of state (business division) for details.
Both S Corporations and LLCs are structured as entities separate from their owners, to minimize owner liability for the debts and activities of the business. Attorney Robert Warwick discusses this issue, which varies by state.
The IRS imposes special ownership restrictions on S Corporations because of the tax advantages of this type of corporation. On the other hand. LLCs are formed in states and are generally not restricted in type of ownership.
Depending on the type of ownership you want to set up and other factors, an LLC or an S Corporation might be better. Attorney Robert Warwick discusses some of these special circumstances.