If you’re ready to launch your new business, you probably have a number of questions. And many of those will involve the law, including which legal entity your business should take. For numerous New York businesses, this question boils down to a choice between an LLC or S-Corp.
Which one of these is best for your company? And once you make the decision, how do you form the appropriate entity? Let Rosenbaum & Taylor be a part of your journey. If you have business formation questions, our team of New York business law attorneys is ready to help.
What Is an LLC?
An LLC, also known as a limited liability company, is a flexible business structure that combines elements of partnerships and corporations. The LLC is a separate legal entity for LLC owners, who are called members.
Key features of an LLC include:
- Limited liability protection: LLC owners (owners) are shielded from personal liability for the company’s debts and obligations.
- Pass-through taxation: By default, LLCs are taxed like a sole proprietorship or partnership. Profits and losses pass through to the owners’ personal tax returns.
- Flexible management structure: LLCs can be managed by members or appointed managers, offering versatility in operational structure.
- Fewer formalities: LLCs have less stringent record-keeping and reporting requirements compared to corporations.
- Flexible membership: There are no restrictions on the number or type of members an LLC can have. An LLC may have a single business owner or multiple owners.
LLCs are popular among small business owners because they combine the benefits of different business structures. This makes them an attractive option for those seeking liability protection without the formalities of a corporation.
A limited liability company offers flexible taxation options. You can choose to be taxed as a sole proprietor, partnership, S-Corp, or C-Corp. Profits and losses can be passed through to your personal income without facing corporate taxes. This means that LLCs avoid “double taxation” on business income, which is where a corporation pays corporate income while owners pay personal income tax.
What Is an S-Corp?
An S-Corp is a special type of corporation that elects to be taxed under Subchapter S of the Internal Revenue Code. An S-corporation isn’t required to pay corporate income tax like a C-corp. does. Instead, company profits pass through to shareholders’ personal tax returns. This means the shareholders only pay tax once on the company’s profits, not twice (as both a company and as shareholders).
Key features of an S-corporation include:
- Pass-through taxation: Like LLCs, S-Corporations avoid double taxation by passing income, losses, deductions, and credits through to shareholders.
- Limited liability: Shareholders are generally protected from personal liability for the company’s debts and obligations.
- Restrictions on ownership: S-Corps are limited to 100 shareholders, who must be U.S. citizens or residents. They cannot be owned by other corporations, partnerships, or non-resident aliens.
- Strict operational requirements: S-Corps must adhere to more formal operational procedures, including holding regular board meetings and maintaining detailed records.
- Potential tax advantages: S-Corp owners who are also employees may be able to reduce self-employment taxes by taking a reasonable salary and receiving additional income as distributions.
Can an LLC Be an S-Corp?
An S-Corp is a tax classification. A limited liability company (LLC) can opt to be taxed as an S-corporation if the business meets the requirements for S-corp status with the Internal Revenue Service (IRS).
Choosing to be taxed as an S-Corp may limit who can own interest in the LLC and how profits may be divided. Limited liability companies that opt for S-corporation taxation must still follow state regulations for LLCs.
LLC vs. S-Corp
There are advantages and disadvantages to both limited liability corporations (LLCs) and S-corporations (S-Corps). Choosing which business entity to go with will require weighing the two against each other.
The choice between an LLC and an S-Corp depends on factors such as the desired management structure, ownership flexibility, and specific tax considerations. While both offer limited liability protection and pass-through taxation, LLCs generally provide more flexibility in management and ownership structure, while S-Corps may offer certain tax advantages for some business owners.
But here are a few of the basic pros and cons for both.
LLCs: Advantages
- The actual formation of the limited liability company is pretty simple. For a single-member LLC, it usually only requires a one-page form.
- Running the LLC is pretty simple as well. There aren’t as many formalities with an LLC versus S-Corp, in terms of actual operations.
- The LLC can shield your personal assets. If your business fails, creditors generally cannot come after your personal assets to pay the business debts.
- Tax benefits. LLCs do not pay taxes as a business. Their profits are passed through to the shareholders and reported on their personal income taxes.
- Flexibility. You can have as many owners as you want in an LLC. Plus it is much easier to modify an LLC if the company grows or otherwise changes.
LLCs: Disadvantages
- Tax drawbacks: Members of an LLC are subject to self-employment taxes.
- Raising capital: LLCs cannot issue stock to raise capital, unlike corporations. A new investor would have to become a member of the LLC.
- Perceived risk: Investors and banks generally consider LLCs to be riskier. This makes them less willing to invest in or lend to an LLC.
S-Corps: Advantages
- Tax Savings. Certain profits in excess of deductions can be distributed to owners as dividends. Dividends may be subject to a lower tax rate than income.
- Raising capital. Since corporations can issue stock, it’s much easier to draw investors and raise capital.
- Protecting assets. Incorporation offers a great way to protect the personal assets of the owners. Generally, only the corporation’s assets can be targeted in legal or creditor actions.
S-Corps: Disadvantages
- Tax drawbacks. There may be certain state and local taxes that apply to the S-Corp. S-corporations generally have higher accounting fees than LLCs due to more complicated tax filings.
- Formation. It takes considerable time and effort to form an S-Corp, and certain requirements must be met.
- Operation. Running the S-Corp is more complicated than running an LLC. Meetings must be held, minutes have to be kept, and there are more formalities.
Choosing the Right Business Entity
The above are only a few of the pros and cons of LLCs and S-Corps. Remember, too, that these are general guidelines. Your exact situation could be different, so talk with an experienced New York business law attorney before what business structure is right for your company.
When you are ready to form your business, a knowledgeable attorney can help. Your lawyer can take care of drafting and filing articles of incorporation, agreements, and other paperwork for starting a business in New York. An attorney can also help explain what fees must be paid. Plus, your lawyer can explain legal obligations for each type of business entity so you don’t run afoul of the law.
Count On Rosenbaum & Taylor for Help Starting a Business
Given the complexities involved in choosing a formal business structure, it’s advisable to consult with a business law attorney. They can provide personalized guidance based on your specific situation and help you navigate the legal and tax implications of each option.
If you’re ready to form your business, or you still have questions, turn to Rosenbaum & Taylor. Our experienced New York business lawyers can advise you on all aspects of business structures. We understand you have many questions and concerns, and we want to see your company thrive. That’s why so many New York businesses trust us for their legal needs. Call us today to find out more.
