By Maryann Lawrence, Startup Rep, Direct Incorporation
You’ve finally decided to make it official. You’re moving from moonlighting to a full-time business owner. Congratulations! Now, it’s time to incorporate your business.
Did you know that if you remain a Sole Proprietor, you will have unlimited liability for your business debts? Yikes! As a general rule, moving from Sole Proprietor to an LLC or S-Corp gives you the peace of mind that comes with knowing that your personal assets are protected should someone bring a lawsuit against you.
But which legal structure is right for your business? Let’s review some quick comparisons:
Benefits of LLCs as compared to S Corps
* LLCs are easy to set up and less expensive to start in most states
* There are less rules and restrictions compared to an S-Corp, which may save you on attorney and accounting fees
* An LLC is not required to hold meetings, keep formal minutes or record resolutions. A Corporation is required to do so, which can prove to be cumbersome
* LLCs can distribute profits as they see fit, where an S-Corporation’s profits must be distributed according to the ratio of stock ownership
* LLCs can be member managed, where an S-Corp must be managed by a board of officers
Benefits of S Corps as compared to LLCs
* You may pay yourself a reasonable salary, plus take distributions at a lower tax rate
* You can raise money from the public in the form of corporate stock certificates, if you later choose to revert to an C-Corp and become publicly traded
* The independent life of the Corporation is not dependent on the incapacity or death of a stockholder, as it is with an LLC in some states
* With S-Corps only the salary paid to the employee-owner is subject to employment tax, where with LLCs, the entire net income of a business is subject to self-employment tax
* Depending on the Corporation’s business record, you may enjoy more access to money from lenders
Do you have questions about which legal entity to choose? Please leave a comment below and I will try to answer them. Thanks! – Maryann
