Typically, people incorporate their business as an S-corp or Limited Liability Company (LLC) because of the tax benefits. Both structures are pass through entities, where the business income is passed along to the small business owner’s personal income, avoiding double taxation
There are 3 main differences between an S-corp and LLC:
Number of shareholders:
- Under an S-corp there is a 75 shareholder limit.
- There is no restriction on number of shareholders under LLC.
- S-corp is managed by board of directors.
- LLC can be managed by business owner or other management.
- S-corp owner pays employment/payroll tax on salaries, but there is no tax on dividends to shareholders.
- LLC owner only pays self-employment tax on total net income. (Note: The owner also has the option to be taxed like an S-corp if the case is made before the 16th day of the third month of the tax year.)
However, beyond these direct benefits and limitations, entrepreneurs must strongly consider the long-term growth goals for the company during incorporation. Generally, venture capital firms and institutional investors favor S-Corp business structure. It provides a formal organizational framework and helps create stock option pools for employees.
For more information on how to start a business, check out our recent blog post on the benefits of registering your company with D&B.