Usually the type of entity best for your particular business depends on your goals, what industry your company is in and a variety of other variables. Because each company is comprised of a unique blend of strengths and weaknesses, the smartest way to begin your venture is with a knowledgeable startup attorney who will guide you in figuring out what structure is most appropriate for your company. I’ll briefly discuss some characteristics for an LLC and a S-Corp though:
LLCs are great if you want liability protection without all the formality as they are very easy and cheap to set up. There are also some publication requirements in most states though. A great feature for LLCs is that they are not taxed as an entity; members are taxed usually in ratio of their ownership percentages (pass through tax). But, if you’re eventually looking to raise capital from investors this might not be the best structure for you. Typically, LLCs are not great for businesses looking for funding for a few reasons: (1) investors really don’t like pass-through entities; (2) the tax partnership rules are complicated; and (3) it doesn’t allow for stock option plans and convertible notes.
S-Corporations are pass-through entities and, as such, are not subject to double taxation. They pay no corporate income tax and the profit and losses of the business are passed-through the stockholders, while the taxes are paid at the individual level. One negative about S-Corporations is the ownership restrictions they have such as not allowing more than 100 shareholders and requiring shareholders to be U.S. citizens or residents. S-Corps can also not be owned by other corporations, LLCs, or partnerships. Lastly, S-Corporations can only have one class of stock.
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