Selecting the Right Business Structure – LLC Vs S-Corp

Posted on by PM Editor

Did you know that Texas is home to 92 Fortune 500 companies? (1) This is not a surprise for many experts because doing business in Texas is much easier compared to many other states. If you are interested in starting a new business in Texas or you already own one that is not incorporated yet, you should take a few things into account. The most important one is to select the right business structure for your business. Typically, people are making a choice between an S-Corp and a Limited Liability Company or LLC. Before we go into details, let us highlight the basics of incorporation.

Why do you need incorporation in the first place?

The fact is that there is more than one good reason for incorporation. Yet, the crucial one is to protect your personal assets from a judgment or from creditors. But, keep in mind that there are many situations when a corporation wants to buy assets, like a corporate vehicle for their employees for example, and the bank that provides the loan will require a personal guarantee. In case you provide such guarantee, then this corporate asset won’t stay protected by the so-called corporate veil. Don’t forget that the same goes for both LLC and S-Corp. Another advantage of incorporation is to get specific tax benefits. Serious business owners are using professional accounting and tax service providers like TaxPM™. These professionals can provide valuable tips and advice related to tax issues.

What’s an S-Corp?

S-Corps are a type of corporations that are one level closer to a different tax categorization. Those who want to opt for S tax treatment must be employees of the corporation. We are talking about so-called pass-through entities that don’t have to pay corporate tax. The income received by the shareholders is taxed as individual income. However, an S-Corp is not allowed to have more than 100 shareholders and every shareholder must be a US citizen or at least a legal resident. In addition, S-Corp shareholders have equal voting power in the company.

What’s an LLC?

Limited Liability Company or simply LLC can usually provide better liability protection compared to S-Corp. This is a very popular option for many small businesses in Texas. Although it’s essentially a pass-through entity just like S-Corp, it can be taxed as a corporation. (2) Most owners like this business structure due to its flexibility. It’s easy to distribute the company income to specific individual members. They pay shares on their tax return. Another great advantage is that LLC doesn’t have a specific management or structure requirements that should be met.

Final Thoughts

No one can say which option is the best because different businesses have different requirements and needs. Generally speaking, LLCs are much better for small businesses as well as for start-ups. On the other hand, S-Corps are a better option for larger companies.

If you are interested in incorporation, use the professional help provided by experienced and knowledgeable experts in this field. Choose TaxPM™ for the best results.