As a creative entrepreneur, you have probably considered starting your own business, and you now find yourself wondering about the different business types that are available to you. There are many business structures to consider, but two of the most common are the S corporation and the limited liability company (LLC). Although they both offer unique benefits, they can have different tax implications and legal structures that might make one option better for your creative ventures. In this blog post, we’ll explore the differences between S Corps and LLCs, and help you decide which business structure is right for you.
• S Corp vs LLC •
Legal Structure
The most significant difference between S Corps and LLCs is their legal structure. Corporations are legally separate entities that are owned by shareholders, and LLCs are seen as a separate legal entity from its owners. In S Corps, shareholders have voting rights and control of the business, and in LLCs, members have more control over business functions. Additionally, corporations must abide by stricter laws and regulations that cover governance, shareholder rights, and reporting requirements, while LLCs have more flexibility and leniency, meaning the company can be run in any way that members see fit.
• S Corp vs LLC •
Taxes
When it comes to taxes, LLCs are considered “pass-through” entities that are not taxed as separate legal entities, meaning the company’s profits are passed to its members, and their personal taxes factor in the profits and losses. An S Corp is also a pass-through entity but is subject to stricter tax rules and regulations that must be abided by. Owners of S Corps must pay employment taxes for themselves depending on how much they consider to take in as salary, which is typically a requirement to be determined by the IRS.
• S Corp vs LLC •
Ownership
The ownership structure is also something to consider when choosing between S Corps and LLCs. S Corps have strict requirements, limiting the number of shareholders to 100 and requiring them to be US citizens. LLCs, on the other hand, have no such restrictions and can have an unlimited number of members. This can be an attractive feature for creative entrepreneurs, especially those who wish to include foreign investors or entrepreneurial friends.
• S Corp vs LLC •
Liability
One of the major benefits of an LLC structure is limited personal liability. Members of the LLC are not personally responsible for the company’s debts, obligations, and liabilities. S Corps, on the other hand, offer limited liability to its shareholders, but they risk being held liable for personal taxes, debts, and liabilities if they don’t follow strict rules about formalities such as holding board meetings, keeping minutes, and electing officers.
• S Corp vs LLC •
Administrative Requirements
LLCs have fewer legal formalities to abide by compared to corporations. They can choose to be manager-run or member-run, depending on how they want their business to be managed. These factors play a significant role in the administrative requirements of an LLC. However, if you’re looking to form an S Corp, you will have more paperwork and filings to complete than when forming an LLC. S Corps have more documentation requirements, such as bylaws, shareholder agreements, annual meetings, and minutes.
Creatively Speaking......
That all said, choosing between an S Corp and an LLC has more to do with the specific needs of your creative ventures. It’s crucial to understand and consider the differences between the two structures before making the decision to form either. An LLC is the most suitable form of business for individual entrepreneurs, small businesses, and those wanting more flexibility in the operation of their business. S Corps are the best for companies that want shareholders to have voting rights and want to follow set conventions and formalities. It’s also crucial to consider legal regulations, taxes, ownership structure, liability, and administrative requirements when making your decision. Forming a business is an exciting step, and understanding which business structure is best for your creative ventures can be a crucial step towards the success of your business.
