When forming a business, you have to think about the structure. In most cases, you will choose between an LLC and an S-corp. It is crucial to consider which formation will benefit your business the most. There are some main differences between the two that may make it easier to decide which is best.
To better understand the differences, Forbes explains what sets an S-corp apart from an LLC and vice-versa.
Understanding an S-corp’s differences
An S-corp is a business formation but not a business structure. An S-corp dictates how the business will experience taxes.
An S-corp may have more formalities involved. For instance, S-corps may involve:
- Holding shareholder meetings
- Keeping minutes for corporate records
- Adopting bylaws
- Issuing stock
If you want to form an S-corp, then you have a 100 shareholder restriction. In addition, shareholders must be permanent residents or U.S. citizens. Many businesses choose to become an S-corp because it can provide you with a means to save on your taxes.
Understanding an LLC’s differences
An LLC is a business structure that you can choose when forming your business. The LLC is separate from its owners. Since it does not have its own tax designation, you would experience taxes like a sole proprietorship. Now, if you have a partner, then you may experience taxes as if you were a partnership.
An LLC may also have certain formalities attached. LLCs must have:
- An operating agreement
- A member managed or manager managed company
- Membership shares
When it comes to LLCs, there are less requirements. In fact, a lot of the guidelines are simply recommendations rather than full requirements.