When forming a business, the number of pivotal decisions you need to make is eye-watering. And yet if you choose correctly at this stage, it’ll be a much smoother ride to success.
Picking a structure for your fledgling company is particularly important, with the main sticking point being whether you form an LLC or an S-Corp.
If you’re new to these concepts and you don’t know which is right, read on as we dismantle and demystify each in turn.
LLCs explained
Limited liability companies are legal entities created by entrepreneurs who want to build businesses without leaving their personal assets hanging in the balance.
For instance, with an LLC you won’t be beholden to any debts that the organization accrues. You’ll also be able to report income and losses made by an LLC as part of your tax return, rather than having to file separately for the business.
LLCs can be owned by an individual, or by a partnership of several people, in which case the aforementioned pass-through taxation process would still apply.
How to form an LLC, e.g. in Florida
There are a few things you need to do to form an LLC in Florida, and you can either choose to handle this yourself or make use of an LLC formation service to take care of all the complex admin instead.
Every newly launched business needs a name, a registered agent, articles of organization, an operating agreement, and an employer identification number.
S-Corps considered
From a liability perspective, S-corporations are identical to LLCs, which gives founders a means of innovating without taking too many risks with their personal financial situation.
When it comes to taxation, S-corps make their income and losses taxable through the people who own shares in the organization. IRS rules on what qualifies as an S-corp are stringent, and the main requisite is that a maximum of 100 shareholders are allowable.
Another important factor for those who want to turn their business into an S-corp is that it has to be registered as an LLC or a C-corp beforehand.
In fact, a business can be both an LLC and an S-corp simultaneously, because these are not mutually exclusive states.
Which one is right for you?
Speaking generally, LLCs are subject to fewer rules and restrictions regarding things like ownership structures and operational requirements than full-blown corporations, whether of the S or C variety.
For example, there’s no cap on how many owners can hold a slice of an LLC, while the 100 shareholder cap on an S-corp is just the start of the obligations and standards to which this type of business must adhere.
Having things like a board of directors, and scheduling shareholder meetings, as well as issuing stock and creating corporate bylaws, will all be a necessity if you go the S-corp route.
For entrepreneurs who are just getting started with a new business project, setting up an LLC is the obvious choice. If it makes sense to move it to an S-corp further down the line in order to optimize your taxation situation, then that’s perfectly possible without needing to also incur any additional liabilities as an individual.
What about growth?
The growth of a business is not just contingent on its structure, and you don’t need to get too bogged down in deciding between LLC and S-corp status early on.
When you eventually do get to the stage that your company is enjoying sustained growth, getting experts in taxation and legal matters involved to advise on and oversee any structural transition is wise.
