How to Start a S Corp or LLC
When you are starting a new business, or deciding to incorporate one you've run for some time, it can be difficult to decide whether to use the structure of an 'S' Corporation or a Limited Liability Company (LLC). It is preferred that you use one of these structures for a business, rather than a sole proprietorship or partnership, so that you (the owner) and anyone else with a vested interest in the company, will be protected personally from any liability issues that might arise. You'll find the main differences between these two structures lie in the management and tax implications of your company.
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Instructions
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Consider your management style. If you are looking for ease of management and flexibility, then an LLC might be the right choice. Ownership of an LLC is not as restricted as an 'S' corp. LLC's are simpler to run because they do not have to conform to the same rigid formalities as an 'S' corp. It can be member-managed (meaning the owners manage the business) or manager-managed (meaning an outside non-owner manager can be hired). An 'S' corp on the other hand must follow the same procedures as a 'C' corp, but a 'C' corp is subject to federal double taxation (the income of the corporation and the dividends paid to shareholders are taxed) and has no limit on the number of shareholders it can have. There is no flexibility in how profits are divided and the directors or officers run the company. An 'S' corp can also have no more than 75 shareholders.
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Determine your employment tax needs. The owner of an LLC is considered to be self-employed and so you must pay employment tax in your tax return to cover Social Security and Medicare. The entire net income of an LLC is subject to this tax. An 'S' corp owner only has employment taxes taken from the employee-owner's salary. However, an LLC files the same 1040 and Schedule C as a sole proprietor whereas an 'S' corp has payroll taxes and the associated paperwork to consider.
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Decide if you will need funding from outside investors. If you do, most investors will not invest in an LLC because they too will have to claim an "unrelated business tax income" (UBTI). You can save yourself the cost of converting into a 'C' corp by starting out right away as an 'S' corp and making yourself available to those outside investors.
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Decide if you'd like to offer stock options or extra benefits to your employees. This will be easier under an 'S' corp than under an LLC.
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Consult an attorney. An attorney will point out areas you may not have considered or thought were unimportant and can save you money and time in the long run.
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