There is nothing more exciting than starting a business. However, choosing the best business entity for what you have in mind can be rather complex. Whether deciding between LLC or S corporation, each comes with unique advantages and disadvantages.
A shrewd business person should, therefore, seek legal advice before picking a suitable business entity for the type of business they want to start. Luckily, the San Francisco, CA business law attorneys of sanfranciscobusinesslawyerblog.com can help you select the best entity for your business.
What to Consider When Deciding Between an S Corporation or LLC Formation for Your San Francisco, CA Business
Many business owners tend to think that the entity selection process is simple. In reality, however, it can be very complex and an experienced business attorney will come in handy. They can help you pick an appropriate entity that best suits your type of business and company goals. Here is a comprehensive look at what to consider when choosing between an S corporation or LLC:
The Company’s Purpose
One of the key variables that decide which business entity best suits your line of business is the purpose of the company. For instance, an LLC is ideal when you are looking to start a holding company. Doing this will shield you from limited liability and protect your business from torts.
However, an S corporation is best suited for you when starting an operating company. It helps you avoid double taxation, reduces your risk, and facilitates easy termination. Therefore, it is advisable to always consider the purpose of the company.
The Involved Formalities
Many small business owners in San Francisco, California want to avoid a lot of paperwork. Therefore, they tend to pick a business formation that requires few documents. In this case, an LLC becomes the most ideal option for these individuals.
Although an S corporation involves a lot of paperwork, it should not deter you from choosing this type of business entity. Have an experienced attorney from sanfranciscobusinesslawyerblog.com help you prepare the documents.
The Business Owners
Forming an S corporation comes with a residency requirement. The owners of the business must be citizens of the United States. Equally, they need to be currently residing within the country.
Anyone can form an LLC and there is no residency requirement. Equally, one person can form an LLC in San Francisco, California. However, single-member LLCs lack the same protections as multi-member LLCs. Ensure you speak with your attorney to learn more.
Professionals that are Involved
licensed professionals – including engineers, nurses, and accountants cannot form an LLC in some states. They can however form a professional corporation. This business entity is specially designed for licensed professionals and includes various advantages including tax deductions and limited liability.
In San Francisco, most professionals cannot form an LLC. Instead, they have to form a registered limited liability partnership. Therefore, an S corporation is your only option when your business involves professionals.
An S corporation is best when you want an individual to manage the day-to-day operations of the business. However, an LLC is most suitable when you are looking to have a company manage the business. Therefore, the management structure you have in mind plays a critical role in determining which business formation best suits you.
It will also help to look at the legal ramifications that come with choosing a particular business structure. Luckily, your attorney can help you figure out what formation suits your management system. They will also ensure you understand the advantages and disadvantages that come with the different management structures.
Personal Taxes of The Owners
S corporation owners are obligated to pay payroll tax and income tax on their earnings. However, limited liability company owners pay self-employment tax and income tax. Your taxes are influential in which business formation to choose.
The biggest difference, however, is in the taxes on distributions and profits. With S corporations, distributions are subjected to income tax and not self-employment tax. All distributions in LLCs, however, are subjected to both income and self-employment tax. A business that expects maximum distributions should consider an S corporation instead of an LLC.
Allocation of Gains and Losses Between Owners
Some business owners want to put a specific percentage of money into the business and have a different percentage allocation of gains and losses. For instance, you might be looking to invest 10% of the capital but want to absorb 90% of the losses. Such arrangements are only possible through an LLC and not an S corporation.
With an S corporation business, you get what you are putting into the business. Putting up 10% of the business capital means you get to enjoy 10% of the profits and 10% of the losses. It is a rather straightforward allocation of gains and losses between owners.
How to File Business Formation Documents
As stated earlier, each type of business structure includes a unique set of formation documents. You need to file the relevant documents with the state to stay compliant. They may include bylaws, operating agreements, and other documents specifying business governance.
Certain business entity types will also require you to submit documents outlining the buying and selling process of the company. Our business law attorney will assist you to handle the following business formation tasks:
- Choosing a business name
- Reserving the chosen name
- File formation documents
- Draft a shareholder’s agreement
- Draft corporate bylaws and operating agreements
- Obtain an EIN
Get an Experienced Business Law Attorney Today
The process of choosing between an S corporation and an LLC business formation is rather complex. You have to consider a lot of variables and ask yourself numerous questions. Do not forget about the paperwork that comes with both business formations.
It is, therefore, vital that you hire a business law attorney to help you determine which business formation best suits your business. The good news is that the San Francisco, CA business law attorneys of sanfranciscobusinesslawyerblog.com are here to help. We will work with you to ensure you have the appropriate structure for your company. Contact us for a free consultation.