A problem most small business owner goes through is picking a protection for their personal assets. This normally becomes a problem once you start to have a growing business. Two of the most common choices entrepreneurs’ debate is Limited Liability Corporation (LLC) or S Corporation (S-Corp). But how do you know which is the best choice for your growing business? In this post I will evaluate the pros and cons of both the LLC and the S-Corp.
Having an LLC or an S-Corp can be beneficial when organizing your business. Having either of the two doesn’t just help protect your personal assets it can also protect your creditors. The investment that you put in is the maximum you are responsible for when dealing with and limited liability. For instants, “If you put in $10,000, and incur $11,000 in debt, you’re only potentially liable for $10,000. Your creditors (check that, your LLC’s creditors) can’t ‘pierce the corporate veil,’ as the phrase goes.” Greg McFarlane mentioned in his book, Control Your Cash: Making Money Make Sense. (http://www.inc.com/guides/201103/s-corp-vs-llc.html)
One of the most common concerns entrepreneurs has deals with the tax side of the two. Jumping straight into it, you don’t have to worry about double taxation when deal with either the LLC or the S-Corp. Google defines Double Taxation as “is a taxation principle referring to income taxes that are paid twice on the same source of earned income. Double taxation occurs because corporations are considered separate legal entities from their shareholders” for those who are ignorant to the meaning.
A few things that an LLC and an S-Corp have in common are liability protection, no double taxation, formalities, legal fee and filing fees. Filing fees for an LLC and range between $200-$600. Filing for an S-Corp can range anywhere between $350-$750 depending on the state you live in. Some pros for an LLC are flexibility in management meaning all members can control the business. Second it is easy to start up. Lastly, its cheap, a couple hundreds can pave the way for you business. My biggest con with the LLC is each member must pay taxes on the dividends made. Second to that you can’t pass your business on to friends or family you business is tied to you. If you die your business dies.
A major S-Corp pro is stock transfer; shareholders can sell shares of stock in the corporation without restriction unlike in an LLC. Some cons are you must be an U.S. Citizen or resident to form. Can only have one class of stock. In addition, I would still recommend that you do more extensive research before choosing one. The decision is ultimately up to you. However, finding out which is best for your business is key.