When clients are contemplating a new business, one of the most common questions they ask and also one of the most important decisions they will make is what type of legal structure should their new entity assume? Most often, new business owners want to evaluate the advantages of the two most common forms of business structures for start-up companies, the limited liability company versus the S Corporation. This decision can have a significant effect on how an individual pays taxes, on issues regarding potential personal liability and the in regard to the amount of paperwork that will be required to be completed by the company. Additionally, if part of the company’s business plan involves raising money, that can also be a consideration in deciding which business structure to use.
Limited Liability companies, more commonly referred to as LLC’s and Subchapter S Corporations, often called S Corps, have many similarities. In Texas, both can have single or multiple person ownership. Both offer owners limited personal liability protection, and both are “pass-through” tax entities. The law allows business owners of either of these type entities to “pass” the income or loss generated by the business “through” to the owner’s personal income tax returns. Accordingly, the special tax status afforded to such entities provides that the owner can reflect the income and losses of the entity in his or her income tax statements, thus avoiding taxation on the corporation, when it receives income, and allowing profits and losses to
flow through to the individual when he or she receives subsequent distributions.
There are also many differences. An S Corp has shareholders and By-laws. An LLC has Members and Regulations. S Corps can only have U.S. Citizens as owners, while an LLC can have non-U. S. Citizens. An S Corp can have no more than 75 shareholders, while a LLC can have an unlimited number of members. S Corps are precluded from having C corporations, other S corporations, LLCs, partnerships, and various forms of trusts from having ownership, while LLCs have no such limitation. The life of an S Corp is perpetual, while LLCs typically have limited life spans.
Another important consideration that differentiates the S Corp from the LLC is the transferability of ownership. LLC’s require the approval of the other members in order to sell or transfer a member interest. In S Corps shareholders are free to sell or transfer their stock ownership without the approval of other shareholder.
When deciding what situation is best for you it is always advisable to first speak with both your lawyer and your CPA to ensure that the decision you make best conforms to your personal needs and circumstances.
This information is not intended to be legal advice and is intended to provide general information only. Do not assume that any information contained herein applies to your specific situation without consulting an experienced attorney and/or CPA. Sending e-mail or requesting an initial consultation does not create an attorney client relationship.