By Alfred Fricano
So, you’re ready to leave the safety and security of your office cubicle and blaze a new trail into entrepreneurship? You have a wonderful vision for a unique new service or special product and are ready to start a small business – congratulations!
You need a business plan
Your passion and vision are a good starting point. Now what you need is a business plan. That’s where things can get complicated. You’re not just a freelancer – you’re a living, breathing business enterprise. How you choose to organize your business will have consequences - legal, liability and tax-related.
This blog will be the first in a four-part series that will help you determine which type of company your new venture should be. Specifically, you’ll learn about the differences between a Limited Liability Company (LLC) and an S Corporation. Each has benefits and shortcomings, which we will discuss. In some cases, your business could have the best of both worlds – we’ll explain how.
The goal of this blog series is to start the conversation by giving you a basic understanding of the options, and offer our assistance in helping you choose the one that’s best for your business.
LLC, S Corp or both?
Business owners, and even attorneys and accountants, can get bogged down in the debate over which is best - the LLC or the S corporation. But it's not necessarily an either/or proposition.
Rather, you can set up an LLC and later elect to have the LLC treated as an S corporation. If your LLC operates an active trade or business, and payroll taxes on the owner or owners are high, you may find that an S corporation is the best choice.
Both organizational forms share the characteristic of "passing-through" their income to the owner(s). Both also provide their owner(s) limited liability protection. But each has some distinguishing features, too. You, as a new business owner, will want to consider the differences as you choose the form for your enterprise.
A few of the main differences include:
· An LLC is easier to operate and administer.
· An LLC offers more flexibility in allocating percentage of profits or losses among the owners.
· Compared to a typical LLC, an S corporation offers more flexibility in paying its earnings to owners as either earned income in the form of salaries and wages or as distributions.
· An S corporation is easier to deal with for various tax planning purposes.
Before choosing one of these options - or a combination of the two – you should determine which features are most important to you and your business. We’ll help you do that.
Next time: Part 2
In Part 2 next time, we’ll discuss the benefits of an LLC, how it’s structured and things to consider when deciding whether to organize your business in this manner.