4 Things to Know When Deciding Between an LLC or S-Corp

So you’ve started a new business, congratulations! Here’s to the next step: legally recognizing your dream. If you’re looking to set up a liability cushion, chances are, you’re deciding between filing as a Limited Liability Company (LLC) or an S-Corporation (a special type of corporation that is taxed like a partnership with no company-level tax).

1. Limited liability means if you go under, you don’t have to worry about the repo man

This is a benefit you can reap from both an LLC and an S-Corp. You are not personally liable if you go bankrupt or get sued, provided you don’t do things like commingling your personal accounts with business accounts and some other basic stuff.

Also, be cautious about personally signing documents or loans, or you will be on the hook personally. But, actions you take properly in the name of the company will be shielded from your personal assets. So, you can rest a little easier at night knowing that you have protection that is not granted to sole proprietors or general partnerships.

2. If you’re not into rules or HATE paperwork an LLC may be the way to go

Corporations have Boards of Directors in addition to shareholders. So, that’s two levels of decision-making. An LLC can have managers, which are basically like directors in a corporation. But, LLCs do not need to have managers. They can be governed entirely by their members, which are equivalent to the shareholders in a corporation. That means no board meetings and no taking minutes. You can forget about a lot of the administration and procedures that are required of a corporation. There is still some paperwork, but it is less than with an S-corp.

3. LLCs can be cheaper

LLCs are sometimes less expensive to form and maintain than S-Corps but different states have different requirements that affect the legal fees and filing costs. With S-corporations, you will need to file a company tax return and you can avoid that with an LLC, so there is a administrative cost savings when it comes time to pay the tax man. As I noted earlier, the actual tax situation (what you pay the tax man) is generally the same with an S-corp as an LLC since neither has a company-level tax.

4. Looking for investors? Consider an S-Corp

Maybe you’re looking to raise venture capital or any type of institutional financing. The structure of a corporation (both regular corporations and S-corporations) make them more attractive to investors and their wallets. This is because investors like the extra layer of decision-making (the Board of Directors) and they are familiar with corporations and how courts decide issues that relate to corporations. LLCs are a little newer (although they have been around since the 1970s) and the people with the money tend to make the rules and they like things that are familiar.

I hope you enjoyed this article! For more legal advice find me at businessattorneyinaustin.com and get a free consultation.

DISCLAIMER: This is general info. Know your own situation. It is always best to hire a lawyer for your specific issues. In the end, I am trying to help you, so don’t sue me.