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IN & OUT TAX SERVICE

Small Business Setup

Make the right decision

Which business structure is best for you?

If you run a startup, new business, or small-scale local business, you may want to stick with an LLC or S Corp. Do you value more flexibility and simplicity? If so, an LLC could be a great option. If you are looking for the credibility and tax benefits of a corporation without concern for flexibility or widespread growth, an S corp could be right for you. And if you really plan on growing your business and becoming a well-known company, a C corp may be your best bet.

When deciding how to structure your business, it’s best to ask yourself: “Where do I see my business heading in the future?” Once you’ve established your key business goals, weigh the pros and cons of LLCs and corporations to see which structure can help you best achieve those ambitions.

Business Classifications

LLCs or Corporation, here we will review a few items they both have in common:

Both are separate legal business entities that offer liability protection for their owners

Both has state compliance requirements they must meet

Each Business classification has its own unique requirements depending on the type of corporation or LLC. The main differences we’ll go over include the ownership restrictions, management structure, and taxation of each type of business.

Limited Liability Company (LLCs)

Ownership structure:

LLCs can have one owner, or multiple owners called members. These are classified as single-member or multi-member LLCs. An LLC has a very flexible ownership structure — it can be owned by individuals, trusts, estates, and other LLCs, corporations, and foreign individuals.

Management:

As you may have guessed, LLCs allow for greater flexibility in their management structures as well. Members can manage the LLC themselves or hire a manager or management team to handle business contracts and day-to-day operations. States often require members to explain their management structure in their Articles of Organization document.

S Corporations
(S corps)

Ownership structure:

Owners of a corporation are called shareholders. S corps are limited to 100 domestic shareholders — foreign shareholders are generally prohibited. These corporations can only be owned by individuals, estates, and certain trusts (not other corporations, LLCs, or partnerships). The ownership percentage is proportionate to the number of stocks they own. Income, losses, and credit items are distributed proportionally based on the number of shares owned throughout the year.

Management:

Unlike LLCs, it is relatively easy for S Corp shareholders to transfer ownership or authorize additional shares to its owners. S Corps can only have one kind of shareholder with one class of stock, and all shares have equal voting rights in the company.

C Corporations
(C corps)

Ownership structure:

There are no restrictions on ownership in a C corp — this kind of corporation can have an unlimited number of shareholders, including foreign shareholders.

Management:

C corps operate with a strict corporate structure. Shareholders must elect a board of directors, hold official annual shareholder meetings, and keep detailed paperwork on everything. Unlike S corps, shareholders of C corps can give owners different voting rights by issuing different classes of stock. This method means some shareholder votes mean more than others.

*The information provided is for informational purposes only and not intended for legal or financial advice.

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