Choosing a business type is crucial to your success as a business owner. But the first steps are usually the hardest. Not sure which type you should go for? We’ve compiled all you need to know between an S Corp, an LLC, and a Professional Corporation.
An LLC (Limited Liability Company), a PC (Professional Corporation), and an S corp share both differences and similarities. Your situation and plans will dictate which business type is best for your organization. Business owners often choose LLCs or S corporations because they are not restricted to licensed professions, unlike professional corporations.
Limited Liability Company
An LLC is an organization that protects owners from being responsible for liabilities or debts. This type of company combines the qualities of a sole proprietorship, partnership, and corporation. While the characteristics of an LLC are similar to other corporations, flow-through taxation to LLC members is more of an attribute of partnerships.
LLCs are authorized under state regulations but may differ from one state to another. Most states do not limit ownership, which means corporations, individuals, foreign entities, foreigners, or other LLCs can be members. However, some entities, such as insurance companies and banks, cannot establish LLCs. An LLC offers more protection and flexibility for investors compared to corporations.
An LLC may avoid directly paying federal taxes. Instead, losses and profits are reflected on the owners’ tax. Nevertheless, an LLC also has an option to choose another classification (e.g., corporation). If an LLC company cannot meet its reporting and legal requirements and fraud is discovered, the creditors can run after the company members. An LLC operates similarly to a typical corporation in several ways, including the protection of personal assets. However, it is much easier to file, document, organize, and manage. It also costs far less to start an LLC. As mentioned, LLCs incorporate the qualities of corporations and partnerships while offering minimum liability to owners and dividing profits among members.
Like an S corporation, members can enjoy the protection of personal assets, whatever operating or financial issues an LLC may face. In several cases, business creditors cannot take hold of the partners’/owners’ assets. An LLC must file the 1065 IRS form to display the partners’ ownership percentages for tax distribution like a standard partnership.
A professional corporation is an organization of professionals who list themselves as a business entity in a particular state. Some states obligate these professionals to get a certification from their regulatory board, while others only allow some professionals to form PCs. Generally, this business structure is open to engineers, architects, lawyers, accountants, and medical professionals.
Some states control the occupations that can establish a PC (For example, Kansas, Illinois, and California. Business owners in corporations are company stock owners or shareholders). Professional corporations exist perpetually, and owners only have limited liability.
Even though PCs do not offer much personal liability defense, unlike LLCs and S corps, the structure still protects a business owner from malpractice suits towards associates. Although PCs do not prevent you from facing lawsuits, they will remove an owner’s liability against claims directed to associates.
An S corporation, which is also called an S subchapter, is a corporation that must meet specific IRC (Internal Revenue Code) requirements. When it passes the said requirement, it can then pass income to company shareholders (including losses, deductions, and credits) without the need to pay federal taxes. It is usually linked with small companies with a maximum of 100 shareholders. S corporations give a company steady benefits while having tax-exempt privileges.
S corps are similar to LLCs. Net profits are shared to stockholders in an S corporation and added as their income. However, both differ when it comes to tax benefits. Other requirements, for example holding regular business meetings, are similar to other corporations. In an S corporation, a business owner creates a corporation according to state regulations, then selects to be individually taxed for IRS reasons.
Liability Protection Reminder
Certain situations may put personal assets at risk when involved in LLCs or corporations. Small businesses often face this issue because the proprietor(s) are usually asked to offer a guarantee in return for loans, leases, etc. When you provide a “personal guarantee,” your assets, such as cars, homes, investment/bank accounts, are all at risk. Other instances involving injuries or illegal activities will also permit the court to eliminate asset protection in LLCs and corporations.
Besides forming a professional corporation, professionals can also create an LLC or S corporation as an addition. In the case of malpractice, the protection in a PC is a crucial thing to consider, especially for medical and accounting professionals. Suppose your business is a partnership or a single-person entity. In that case, LLC is an excellent option to obtain personal asset defense without being involved in complex corporate requirements and needs. If you want to maintain your company’s privacy and attract stockholders without public offerings, then choose an S corporation.
Interesting Related Article: “Exploring the Financial Benefits of Forming an LLC“