Hello, I'm Karla Mitchell. Going through a legal case can be very expensive and challenging. I won't go into details, but I recently underwent my own legal battle that lasted several years. It is finally over and I successfully received a settlement, but I had to spend so much time studying law in order to play my role in my own court case. While I found a great attorney at one point, I felt completely lost initially and I don't want anyone else to experience the same thing. So I decided to create this blog for those who would like to know more about law.
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Starting a business can be complicated and confusing, especially when it comes to deciding which type of business structure to use. Many startup businesses choose S corporations or limited liability companies (LLCs), and one of these might be right for your new venture. The trouble is determining which one would be better. A business attorney can help you make this decision, and he or she will help you complete the procedures required for forming the company legally. Here are three factors to compare in LLCs and S corps that may help you decide which is better for you.
Limited Liability
One of the benefits offered through both types of business structured is limited liability. Limited liability refers to the protection you have over your personal assets. With limited liability, creditors will never be allowed to go after you and the things you personally own if your business owes money. Your personal life will be kept completely separate from your business, and this is not the case with certain types of business structures, such as proprietorship and partnerships.
Taxes
Both of these types of business structures are good because they do not require paying corporate taxes, which means you can avoid double taxation by choosing an LLC or an S corp. There is a difference with how taxes are handled though.
With an LLC, the owners of the company do not collect regular paychecks that have withholding. Instead, each owner is responsible for paying taxes on a certain percentage of the total net income the LLC makes. The net income is divided between the owners based on the agreement of the LLC.
For example, if there are two owners and each is entitled to 50% and the company makes $120,000, each person will have to report business income of $60,000. This income must be reported on each person's own tax return. Each person will then have to pay taxes on the money, including self-employment taxes.
LLCs do not pay unemployment taxes or payroll taxes themselves for the owners of the company. Owners of an LLC will typically be required to make estimated tax payments quarterly though.
An S corp is quite different from this. Each owner of the company collects a regular paycheck, and the company withholds all the normal taxes from the paychecks. The company must then match the necessary taxes, and the company can write these payroll taxes off as an expense. Each owner will receive a W-2 at the end of the year that will have to be recorded on the person's tax return just like any other W-2.
If the company makes a profit after paying regular paychecks, the profit is split between the owners according to percentages stated in the agreement. Each owner must then record this as income on his or her tax return.
Start-Up Information
The other key difference between LLCs and S corps is the work needed to start each type. If you want the easiest type of company to start, you may want to pick an LLC. LLCs are simple to form, and you might even be able to start one without hiring a business attorney.
S corps are harder to begin because they require more paperwork, and because there are more legalities involved. If you want to start your new business as an S corp, you will most likely need to hire a business lawyer to help you.
LLCs and S corps are both popular types of business structures. While they are similar in nature, there are differences between them. If you would like to learn more about these, contact a business attorney in your area. To learn about how a business attorney can benefit you, click here for more info.
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