My answer to I’m forming a small web design business in the USA with two friends. Is there a reason I should form a…
Answer by Raad Ahmed:
Know that you aren’t alone when it comes to comparing LLC and S Corporation. Many business owners consider which solution is best and how that decision will impact their business in the future. The two entities are different, but they have a few similarities as well.
Let’s take a look at some of the similarities and differences between the two.
- State Requirements-Both include state-mandated rules about annual reporting and proper licensing.
- Limited Liability-In both scenarios the owner is not personally financially responsible.
- Separate entities-Both are considered separate entities created by proper filing at the state level.
- Pass-through taxation- S corporations file business tax return while only file business tax returns if the LLC has more than one owner. However, no taxation is paid on the business level and can be handled instead on the personal level.
- Ownership: LLCs can have unlimited owners while S corporations can have up to 100 so long as they are individuals, qualified trustees or S corps.
- Citizenship: LLC owners don’t have to be US citizens, and while an S corporation owner doesn’t have to be a citizen, they must be a U.S. resident.
- Formalities: S corporations have many more formalities they must follow while LLCs can operate with formalities as merely suggestions and not requirements.
- Management: LLCs and S corporations are similar in management since most S corps mimic an LLC from a legal standpoint. S corps is formed as a federal tax designation that can only be formed from an existing entity such as an LLC or a corporation.
To know which entity is best for you, you should consult a business attorney. Depending on how you see the future of your business, one entity may be the better solution.
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