By C. Daniel Baker
When starting a business or growing a business from a sole proprietorship, the limited liability company LLC and the S corporation are the go-to entities for small business owners. Both entities provide liability protection which prevents business creditors and those with a judgment against you from accessing your personal assets and act as a pass through, which means that all income from LLCs and S-corps are treated as income of the individual owners. However, there are various differences between the LLC and S-corp.
Instead of randomly choosing one or the other, here are some of the differences that may affect which one you choose for your business:
1. Corporate Formalities: LLCs generally do not have to maintain corporate requirements, even though it’s good practice to maintain separate company records. In some states, LLC owners are required to file a simple biennial statement with the Secretary of State, but that’s about it. S-corps, on the other hand, are required to maintain corporate formalities in order to keep their liability protection. S-corps must keep meeting minutes, a board of directors, officers, separate business accounts and appropriate records for all of their business transactions.
2. Allocating Income: This issue only comes up when there are several owners of the business or when additional owners will be added in the future. LLC owners may allocate the business income to its members disproportionately. That means that two owners may split the income 60-40 instead of 50-50. This may be important in situations where each owner contributes to the business differently — for example, where one owner is putting up startup capital and the other is putting in sweat equity. S-corps do not have this flexibility. Owners of an S-corp (also known as shareholders) are required to split the income equally among all of the owners.