If you are thinking about starting a business in 2022, one of the most important decisions you’ll have to make is determining what business structure to register your company as.

Even though according to statistics from the U.S Census Bureau, sole proprietorships have remained the most common form of business entity in 2021, this is predicted to change as a result of the propelling proliferation of the online incorporation service industry following the COVID-19 pandemic.

This is because business structures which (at least traditionally) involved significantly more time and procedural hassle during their setting up process- such as Limited Liability Companies (LLCs), Corporations, and S-Corps, generally provide a plethora of exclusive financial, structural, and tax benefits which owners of sole proprietorships are not privy to.

Below we will compare LLCs and S Corporations, delineating the advantages and disadvantages of each one along the way.

Limited Liability Companies (LLCs)

An LLC business is said to offer a much more ‘’formal’’ structure than that of a sole proprietorship or a general partnership, which can go a long way in ensuring that a business owner’s business has the required level of ‘’marketability’’ and brand image so as to attract wealthy investors in the future, as well as to attain favorable terms when negotiating for future loans with conventional lenders- such as banks and credit unions.

LLC owners additionally enjoy limited liability under the law- at least to some extent. This is because LLC companies are legally considered to be separate financial entities to their owners- unlike sole proprietorships and general partnerships.

This means that (simply put) one of the significant benefits provided by LLCs is their ability to provide a ‘best of both worlds’ option between the generally flexible and non-scrutinized sole proprietorship structure and the financially advantageous Corporation and S-Corp structure.

Having said that, it should be noted that LLC owners’ actions can, at times, ‘’pierce’’ the aforementioned corporate veil- forfeiting any personal liability limit under the law.

For example, where an LLC owner has personally guaranteed a loan in the past, or where federal bodies (such as the IRS) determine that the way in which an LLC is managed is practically identical to that of a sole proprietorship, the right to a limited personal liability will be revoked.

S- Corporations

An S-Corporation, on the other hand, is a tax classification- rather than a business entity structure. Businesses invoking an ‘’S-Corp’’ classification under the law within the U.S will be taxed like a general partnership according to the IRS.

This means, in order to attain S-Corp status, a business must first be incorporated (registered as either an LLC or a Corporation), and then satisfy a plethora of federal guidelines that have been set in place.

Owners of S Corporations can enjoy limited personal liability under the law, and- as long as they retain fewer than 100 shareholders, can be taxed as a general partnership instead of a Corporation.

This can help shareholders of Corporations alleviate burdens imposed upon them by double taxation- whereby the same stream of revenue is initially taxed at a federal level (corporation tax) and then taxed for a second time at a personal income level.

Conclusion

All in all, the business structure that you choose will undoubtedly play a key role in determining your business’s future success. This is because it will impact vital aspects of your company’s daily operations- such as your personal liability, tax rate and structure, management style, and state & federal obligations (filing procedures).

Your business entity structure can additionally influence the extent of your future growth, as it can determine the number of shareholders that your business can entail.

As both Limited Liability Companies and S Corporations are becoming extremely popular options, comparing s corp vs llc structures is not easy. This is particularly the case since the introduction of the Small Business Protection Act [1996]- which established a variety of tax-law-related changes in a corporate context, including enabling S Corporations to purchase an unlimited % of the stock in C Corporations.

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