What’s the Best Business Structure for Your Enterprise?
You’re planning on starting your own business. One of the first and most important questions involves your choice of legal form. For many new business owners, the choice often comes down to a subchapter S corporation or a limited liability company (LLC). What are they and what are the differences?
What is a Subchapter S Corporation?
Technically speaking, a Subchapter S corporation is not a type of business structure—a corporation is. A subchapter S corporation is really a tax election, a way of treating (for tax purposes) a corporation that meets certain requirements. A “corporation” is a legal entity, duly established under state laws, which has the ability and legal authority to act as a single entity. To qualify as an S corporation, a company must:
- Have no more than 100 shareholders, all of whom must be American citizens or legal residents of the United States
- Be set up as a domestic (as opposed to foreign) business entity
- Issue only one class of stock
A corporation must also affirmatively elect to be treated as an S corporation. It will not automatically qualify as one by meeting the above criteria.
The benefits conferred by subchapter S status include:
- Limited liability—A shareholder will only be liable for the debts and obligations of the company to the extent of his or her investment. Personal assets and wealth are protected
- Pass-through tax treatment—All income of an S corporation passes through to the shareholders. Unlike a C corporation, there is no tax at the corporate level.
- Ease of transfer of ownership—S corporation status typically allows you to freely transfer ownership without terminating the business or incurring any tax consequences
What Is a Limited Liability Company?
Similar to a corporation, an LLC is a legal entity, separate from its owners (called “members”), capable of acting on its own. Limited liability companies are typically established under state law, and the qualifications vary from state to state. Like an S corporation, the income from an LLC passes through to members—there is no entity-level income tax. An LLC also offers the same protection of personal assets and new worth provided by a corporation.
Some of the advantages of an LLC include:
- No limit on the number of members
- Eligibility for non-residents or foreign nationals to be members
- An LLC can be owned by a corporation—an S corporation cannot be owned by another corporation, an LLC or a partnership
- LLCs tend to have fewer filing and recordkeeping requirements
- An LLC may be managed by members—an S corporation is overseen by the board of directors
Contact Attorney Howard N. Sobel
At the office of Howard N. Sobel, we provide comprehensive counsel to businesses and business owners throughout the state of New Jersey. Contact our office online or call us at 856-424-6400 to see if you qualify for a free initial consultation. Evening and weekend appointments can be arranged upon request. We accept all major credit cards.
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