How to Incorporate: S Corp or LLC?

By Larissa Bodniowycz, J.D.

How to Incorporate: S Corp or LLC?

By Larissa Bodniowycz, J.D.

If you're starting a business or running a business, you have probably considered forming a limited liability corporation (LLC) or an S corporation, often referred to as an “S corp." You've probably also wondered which is better. The short answer is that it depends on your business and your goals. LLCs and S corporations provide many of the same benefits, but they also have their own unique advantages and drawbacks.

A succulent, calculator, pen, glasses, notebook, and tablet with the words "S Corp or LLC" displayed on the screen

LLC and Corporation Similarities

LLCs and S Corporations both provide limited liability protection. This is one of the main reasons for creating a formal business entity instead of just operating under your own name or a doing business as (DBA). Limited liability protects your personal assets from the reach of business creditors. For example, as long as you follow the requirements, a creditor of your business cannot go after your car, home, or bank account to collect.

LLCs and S corporations both have tax advantages. They offer pass-through taxation. Historically, businesses had to pay taxes on their income twice: once on business taxes and once on personal income taxes. C corporations are still subject to this type of double taxation, but LLC and S corporation owners are taxed on a “pass-through" basis where they only pay at the personal income level.

Other businesses tend to consider LLCs and corporations more established and reliable than individuals who operate a business under their personal name. It also makes the business more appealing to potential lenders or investors who usually will not invest unless the business is an LLC or corporation.

LLC Advantages and Drawbacks

LLCs are a relatively new business form, but a very popular one. An LLC is a very flexible structure. Through operating agreements and member agreements, LLCs can be structured in a wide variety of ways. Once formed, LLCs have very few ongoing paperwork requirements. They are easy to run. Additionally, unlike S corporations, LLCs can have an unlimited number of owners and owners do not have to be United States citizens.

There are few disadvantages of an LLC for small businesses. The main drawback for larger businesses is that the LLC structure is disfavored by many investors and some other businesses. For this reason, an LLC is usually not the best choice if you anticipate taking on investors, merging with another company, or being bought out by another company in the future.

Corporation Advantages and Drawbacks

Corporations have a long history and remain a popular form of business. The separation between corporate owners and investors and corporate managers is more clearly delineated than in LLCs. For this reason, some investors will only invest in corporations and not LLCs.

The main drawback of operating as a corporation is that it is more complex than an LLC. There are more rules and more paperwork involved in operating a corporation. It is also more difficult for an owner to leave a corporation than an LLC. Additionally, only U.S. citizens can be owners of an S corporation and the number of owners of an S corporation is limited.

When choosing between an LLC and S corporation, consider your business's current state and its future goals. It is easier to select the correct form of business at the start than to change it down the line.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.