When you first start a business, you may not think about what type of business structure you need. That usually means, by default, you become a sole proprietor. However, a sole proprietorship isn’t a formal business entity. You don’t need to file paperwork to become one, and many small-business owners find this works for them.
But there are drawbacks: Because you and your business are essentially one, there’s no legal separation between the two. One option is to choose a business structure that will separate you from your business to protect your personal assets. Suitable business structures to consider are an S corporation and limited liability company (LLC).
This S-corp vs. LLC guide compares the differences and similarities between the types of business structures and their pros and cons.
What is an S Corporation?
An S corporation, or S-corp, is a business structure that offers limited liability protection to owners and shareholders and certain tax benefits. You must meet some requirements to qualify for it, including having 100 or fewer shareholders and operating in the US..
The protection of personal assets is a benefit that attracts many business owners to the S corporation, but this structure also provides other perks, especially compared to other types of corporations.
That’s because, S corporations aren’t taxed twice, like C corporation owners, instead taxes pass through to the business owner’s personal income tax. This means you file taxes once for both yourself and your business.
What is an LLC?
A limited liability company, or LLC, is a type of business structure that combines the limited liability protection of a corporation with the flexibility and simplicity of sole proprietorship or partnership.
Forming an LLC establishes your business as a separate legal entity from yourself as an owner, so they are not responsible for the debts and liabilities of the business. There aren’t many ownership restrictions for LLCs, making them a more flexible option for business owners, who can choose to be taxed either as a corporation or pass-through entity.
Differences between S-corps and LLCs
There are some differences between S-corps and LLCs, including ownership restrictions, taxation, and management. Here are some of the main differences: