Starting a business can be a very broad project comprised of a million little things you have to organize. One of those decisions will be which type of corporation you will incorporate your company as. Of course, unless you understand the difference, you can’t make this important step. Different corporations have different aspects which affect anything and everything from taxation, pass throughs, double taxation, allotment of income and debt, income reporting and the list goes on.
What is an LLC?
Many people wonder exactly “What is an LLC?”, however simply because it seems like a safe, common corporation type it may not be the best fit for the type of business you are incorporating. Seeking professional advice to assist in the decision process is the smartest first decision; without a basic understanding you will not be able to avoid serious snags in the future.
An LLC is a Limited Liability Company. An LLC offers specific benefits as a business relates to taxation. Liability for a company that could breech your personal gains, bigger liabilities to your company, and assets that are person are dealt with a much less formality. A potential liability could be anything from a supplier who was never paid, a dissatisfied customer, or any situation in which someone or a group of people could file legal action against you or your business.
LLCs offer a less structured incorporation; if two people open a company with each party assuming 50-50 sharing then taxation will be calculated on the original agreement that the LLC was set up to operate under. If one party decides to step back from the company, however, perhaps putting in less effort and time which means the other party will step up more, the two parties have the freedom to determine which way to split up revenue without changing the structure. Should the business increase its profits while one of the parties is carrying more of the responsibility than the other and they decide that it is fair to split up income 80-20 even though on paper they share responsibility 50-50, the LLC provides the flexibility necessary for owners to make decisions such as this.
What is an S Corporation?
S corporations differ from LLCs in several ways, but especially when we take a peek into the income allocation. LLCs create flexibility amongst partners for the majority of decisions that relate to business income allotment, but an S corporation is much less amiable in this respect. Taking the scenario from above, and changing the business structure to that of an S corporation rather than an LLC, it would make absolutely no difference if one party was working more or contributing more to the company than the other, or if they wanted to divide profit in a different way. They would not be able to do so because an S corporation is structured in a more binding way legally. If the original agreement the parties entered into upon the upstart of the business was 50-50, it must remain 50-50.
As an S corporation relates to stock, it allows shares to belong to members who are both non-voting and voting, but restricts the number of shareholders to 100 people. There is a significant amount of requirements for an S corporation when measured against an LLC; a board of directors that meets on a consistent basis is one of these requirements, shareholder meetings, and annual reports must be filed. Because it is a much more formal structure minutes must also be kept and filed of any meetings.
While both types of corporations can be beneficial for taxation purposes in a much more lenient way as opposed to say a C corporation, it is of utmost importance to seek professional guidance from a corporate services company or attorney as you lay the foundation of your business blueprint.
What is an LLC?
Many people wonder exactly “What is an LLC?”, however simply because it seems like a safe, common corporation type it may not be the best fit for the type of business you are incorporating. Seeking professional advice to assist in the decision process is the smartest first decision; without a basic understanding you will not be able to avoid serious snags in the future.
An LLC is a Limited Liability Company. An LLC offers specific benefits as a business relates to taxation. Liability for a company that could breech your personal gains, bigger liabilities to your company, and assets that are person are dealt with a much less formality. A potential liability could be anything from a supplier who was never paid, a dissatisfied customer, or any situation in which someone or a group of people could file legal action against you or your business.
LLCs offer a less structured incorporation; if two people open a company with each party assuming 50-50 sharing then taxation will be calculated on the original agreement that the LLC was set up to operate under. If one party decides to step back from the company, however, perhaps putting in less effort and time which means the other party will step up more, the two parties have the freedom to determine which way to split up revenue without changing the structure. Should the business increase its profits while one of the parties is carrying more of the responsibility than the other and they decide that it is fair to split up income 80-20 even though on paper they share responsibility 50-50, the LLC provides the flexibility necessary for owners to make decisions such as this.
What is an S Corporation?
S corporations differ from LLCs in several ways, but especially when we take a peek into the income allocation. LLCs create flexibility amongst partners for the majority of decisions that relate to business income allotment, but an S corporation is much less amiable in this respect. Taking the scenario from above, and changing the business structure to that of an S corporation rather than an LLC, it would make absolutely no difference if one party was working more or contributing more to the company than the other, or if they wanted to divide profit in a different way. They would not be able to do so because an S corporation is structured in a more binding way legally. If the original agreement the parties entered into upon the upstart of the business was 50-50, it must remain 50-50.
As an S corporation relates to stock, it allows shares to belong to members who are both non-voting and voting, but restricts the number of shareholders to 100 people. There is a significant amount of requirements for an S corporation when measured against an LLC; a board of directors that meets on a consistent basis is one of these requirements, shareholder meetings, and annual reports must be filed. Because it is a much more formal structure minutes must also be kept and filed of any meetings.
While both types of corporations can be beneficial for taxation purposes in a much more lenient way as opposed to say a C corporation, it is of utmost importance to seek professional guidance from a corporate services company or attorney as you lay the foundation of your business blueprint.