Feb 2014

Starting Your Business: LLC or Corporation?

Choosing the Right Business Entity

Whether you are just starting a new venture or growing your business beyond a sole proprietorship, you must decide which business entity suits your needs. In the world of small business, there are two clear choices: a limited liability company (LLC) or an S-corporation (often shortened to s-corp).

Both LLCs and s-corps do what a sole proprietorship does not, and that is remove your personal assets from the reach of your business creditors. Additionally, both entities treat business income as your personal income for tax purposes.

Differences between LLCs and S-Corps

Despite the similarities, there are several key differences between LLCs and s-corps.

Income Allocation

If your business has several owners, an LLC allows you to distribute income however you wish. For example, a two-member LLC can distribute income in a 70-30 split in cases where one member contributes more startup money while the other is on the ground handling day-to-day operations. In an s-corp, however, income must be evenly distributed among the shareholders regardless of the distribution of capital or labor.

Corporate Requirements

Missouri does not require LLC owners to create an operating agreement, maintain company records, or file an annual report with the state. Corporate formalities are limited to obtaining state and federal tax identification numbers and, in some situations, a business license. An s-corp, on the other hand, must adhere to all the formal corporate requirements, including creating by-laws, shareholder agreements, minutes, resolutions, keeping separate business records, maintaining accurate accounts, appointing corporate officers, and holding board of directors meetings.

Taxes

Both LLCs and s-corps are “pass-through” entities for tax purposes, which means business profits pass through the business entity and get taxed as the personal income of the owners. If you run a single-owner LLC, you are taxed like a sole proprietorship, which means you can simply attach a Schedule C form to your personal tax return. This is a fairly easy transition for business owners accustomed to working as a sole proprietor. If your LLC has several owners, you can choose to be taxed as a corporation or a partnership. Because the tax implications of an LLC versus an s-corp are complicated and quite comprehensive, it is important to work closely with a business attorney before deciding which entity works best for your business.

Ownership Restrictions

In Missouri, as in most states, an s-corp can have no more than 100 shareholders. By contrast, LLCs can have any number of owners and can even be owned by corporations and other LLCs.

Making the Right Choice for Your Business

Choice of entity is one of the most important decisions you will make as a business owner. To discuss your business needs and goals with one of our knowledgeable attorneys, call our office today at 417-841-2775.