Basically, the answer to your question depends on how you plan on developing your company and what direction you see your venture going in. One of the basic questions is whether you plan on keeping this a smaller, closely held company or whether you plan on trying to expand more significantly. If you only see your business staying within your sole ownership, or within a limited pool of ownership interests, then an S-Corp. could be beneficial. However, there are other considerations you should think about.
One of the distinctive differences between the two legal entities is their restrictions. Overall, S-Corps are significantly more restrained regarding who can own them, how their shares can be held, etc. However, there are also a number of similarities as well. Here is a comparative breakdown of the two:
1. Limited Liability: Both entities will provide owners with protection of their personal assets. Each one is considered a separate legal entity, thus the owners are separate from the company itself.
2. Pass Through Tax: Generally, income tax is not paid at the business level in either an S-Corp or LLC. Rather the business profits pass through and are taxed at the personal level of each owner.
3. Formalities: Each entity requires state filing requirements, which may vary depending on what state you are looking to operate in.
1. Ownership: LLCs can have any amount of owners/shareholders. However, S-Corps are limited to just 100 shareholders. So there are definite implications with this restriction if you are considering expanding your company to a larger market with bigger investors later on down the road.
2. Who can Own: LLCs may be owned by any individual regardless of their citizenship. However, S-Corps can only be owned by US citizens or residents. So once again, depending on where you want to expand and who may be an investor, you will want to keep this limitation in mind.
3. What can Own: LLCs may be owned as subsidiaries, being controlled by parent Corps., LLCs, partnerships, etc. However, S-Corps must be owned by individual shareholders, and cannot be a subsidiary of some other type of business entity. Thus, another limitation to keep in mind when seeking investors.
Realistically, your best bet is to consult with a lawyer who can give you an in-depth look at what your best options are. The state you want to incorporate under will depend on a number of different things, like where you will being working out of, what laws best suit the needs of your company, other advantages available in some states and not others, etc. A good business lawyer will be able to steer you in the right direction you can be confident when making your decision about where/what to incorporate as.
You should check out our sitewhere you can search for a startup attorney based on your needs and budget. Lets face it, no one wants to hire a lawyer because it means added costs for your business. But in the long run it can really be beneficial and end up saving you a lot of money and time. Take it from me. I have founded two separate startup companies, and I cannot tell you how grateful I am that I consulted lawyers throughout the process.
Other than that, I wish you the best of luck with your company. I hope this answer was helpful. If there is anything else I can help you with please don’t hesitate to reach out!