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LLCs or S Corporations: Which is Right for My Business?

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If you’re starting a new business and your needs extend beyond a sole proprietorship or partnership, you might be wondering whether you should create an LLC or a corporation. And, then, to make it more complicated, there is something called an S corporation as well.

You may consider exploring a new type of business organization in order to protect personal assets and/or benefit from potential tax breaks. Some business owners find themselves torn between an LLC and S corporation. Without a clear understanding of how each business organization structure works, you cannot make an informed choice.

If you’re debating on setting up a new business, it’s important to speak with a skilled Washington DC business attorney who can share their expertise and help you choose a business structure that’s right for you.

Here’s a look at a few similarities and differences between LLCs and S corporations.

How LLCs and S Corporations are Similar

Both LLCs and S Corporations provide some personal liability protections. In most cases, your personal assets cannot be attacked by company creditors. Essentially, you can’t be held liable for more than your investment in the company itself. Unless there is proof of something that can “pierce the corporate veil,” like commingling personal funds with business accounts, then your personal assets should be protected.

Both types of business structures are treated as pass-through tax entities. This means the business does not pay income tax at the company level. Income and losses are passed through to the owners and shareholders who report them on their personal tax returns. This avoids the common “double taxation” issue traditional corporations are subject to.

How S Corporations and LLCs Differ

One of the most important ways LLCs and S corporations differ is in their ownership requirements. The IRS has established very strict regulations regarding S corporation ownership. Not every business who wants to be an S corporation will qualify. For example, if you have more than 100 shareholders, you won’t qualify. Do you have fewer than 100 shareholders but one of them is a non-US citizen or another corporation? You won’t qualify either. LLCs are not subject to the same strict rules required to elect S corporation status.

Management of an LLC is more relaxed and flexible as well. Owners, who are called members in an LLC, can opt to manage the LLC (member-managed) or appoint a manager (manager-managed). S corporations must have a board of directors and elected officers. LLCs also don’t have the strict rules regarding record keeping of meetings.

Another major difference is that an S corporation is essentially in existence forever. Corporations can exist in perpetuity, which is very different from LLCs. If a member decides to depart, it could result in dissolution of the LLC.

Making the Decision

There is no “one model fits all” for business owners. It’s important to weigh all the pros and cons and learn more about how LLCs and S corporations are required to operate. If you are looking to set up a new business, contact the attorneys at Tobin O’Connor & Ewing. Let one of our skilled Washington DC business law attorneys help with all your potential LLC and corporation needs.

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