LLC stands for limited liability company and is legally a business structure that can help protect your personal assets. One advantage this structure has is the ability to experience tax benefits similar to a full-fledged corporation, according to the book Form Your Own Limited Liability Company authored by Anthony Mancuso. Entrepreneurs may wish to think long and hard about whether they really want to deal with a full S corp structure when they can experience tax benefits and asset protection–with less potential drama–doing business as a LLC.
Some people choose to work as sole proprietors. The risks of that choice are outlined in the Bright Hub article Four Advantages of a Corporation over other Organizational Forms.
Structure and Paperwork
One advantage an LLC has over an S corp is a simpler structure and a lot less paperwork to handle from the beginning.
Any corporation requires shareholders and a board of directors, and an S corp is no exception. The directors are expected to have annual meetings. Paperwork supporting these meetings–basically minutes taken by a recording secretary–is usually filed each year with the appropriate Secretary of State.
Creating and filing an articles of incorporation–not required for an LLC but required for an S corp–could be another potential headache for a beginning entrepreneur. This is a mandatory step for a company seeking official S corp status. Many times those pursuing a formal incorporated structure turn the task over to an attorney or a document preparation service because of the intricacies involved in the process.
Shareholders and Stocks
An S corp has a number of limitations on how many stocks can be made available as well as just who the shareholders can be. However, the LLC does not have such legal limitations.
If you actually create an S corp, your company can only have 100 shareholders. Additionally, only one class of stock is permitted. The LLC does not have these limitations, creating another advantage for those grappling with the issue of whether or not to actually pursue a full S corp structure.
Another potential advantage an LLC structure has over an S corp is regarding U.S. citizenship. All shareholders must be legal U.S. residents or citizens. While this may seem easy to control, keep this in mind. If one of your shareholders dies and leaves his share to a child or spouse who is not a U.S. citizen, your corporation could automatically lose its corporate status.
Additionally, an LLC is not barred from having other corporations as shareholders. However, an S corp is. The corporation must have only individuals or approved trusts as shareholders.
If your S corp loses its status–even through no intentional fault of the company–it automatically cannot restore its status for five years. This is a real disadvantage that the LLC does not risk. Simply put, if someone loses a piece of paperwork or a shareholder crisis happens, you could be put out of business.
Finally, the small business may especially wish to select an LLC structure over the S corp. It is simply more cost-effective. The initial start-up fees are usually less than $200, and often do not require the services of an attorney. On the other hand, S corp filing fees usually well exceed $200 and many people need to hire an attorney. If your business is young, it may be advantageous to opt for the reduced costs–and potential headaches–and choose an LLC over an S corp.
But if you still want to go ahead and acquire an S corp structure, make sure you know all the facts first. Read the Bright Hub article The Benefits of S Corporation Status as an Organizational Form to learn more.