LLC vs. S-Corp (hint: you may want both)

Which is right for you? An LLC or an S-Corp, or maybe neither? (Hint: the answer could be both) This article covers the benefits and drawbacks of each entity, as well as the benefits and drawbacks of doing business as a sole proprietor or regular corporation, also called a “C-Corp.”

Do I have to incorporate a business at all?

In some cases, your local, state, and federal government doesn’t care if you incorporate your business or not so long as you are operating under your own name and reporting any business income and paying taxes on that income. There are a lot of people that do this—local handymen, t-shirt printers, artisans, and so on, although they’re not always operating legally.

Some jurisdictions will require you to obtain a business license even if you’re doing business under your own name. You can usually just go to your city hall and fill out some forms, or you can take care of everything online here.

If you’re just doing business using your own name or you simply have a business license, your business entity is called a “sole proprietorship” or a “DBA” which stands for doing business as. Some jurisdictions also call this an FBN or fictitious business name if you’re using a name that is not your own but have not filed a formal business entity.

This is obviously a fast, cheap, and easy way to get started with your business, but it could cost you everything. You could be personally sued and lose your personal assets in the course of doing business. If you’re doing something relatively simple and safe, like designing t-shirts or selling cups online, your likelihood of being sued is probably low. However, if you are sued you could lose everything.

Why to incorporate

If you incorporate a business, that business becomes a separate entity that protects you from personal liability.

Let’s say you have a business mowing lawns, and during the course of a day you accidentally injure someone or damage their property. If you have a separate business entity, like an LLC or S-Corp, then the plaintiff will have to sue that business and only business assets can be affected, which are often minimal for small businesses.

If you don’t have a legal business entity, then you could have to sacrifice your house, your car, and anything that you own to cover the damages.

When you incorporate a business, you also own that business name and show that you’ve taken steps to become a legitimate legal entity.

This is why most people today choose to incorporate as either and LLC, S-Corp, or combination of the two. Since business filing starts at $79 and can protect you from losing everything you own, it’s kind of a no-brainer.

Let’s look into the two most common types of small business entity.

What are the benefits and drawbacks of an LLC?

LLC stands for Limited Liability Company because it limits your personal liability without all the complications of setting up a corporation. The LLC was invented over 40 years ago in Wyoming, based on a European business entity, and today LLCs make up over two-thirds of all new companies formed.

LLCs are much simpler than corporations. If you form a corporation, you have to have shareholders that elect directors—so now you have a board of directors. Those directors appoint officers—so now you have a president, vice president, etc. who then run the company. It’s a complicated three-level structure, and for most small corporations, you are all three of those—the shareholder, director, and officer. But in that set up you have to wear multiple hats, so nobody really wants to do all that unless you need to start a big company right away.

That’s why so many people choose the LLC—fully 70% of businesses formed on MyCompanyWorks.com are LLCs. They allow you to set up an official business entity that protects your personal assets, while being nearly as easy and simple as a sole proprietorship. Instead of the directors, officers, and shareholders of a corporation, you only need one person called a member. Most LLCs are single-member LLCs, but you can have multiple member LLCs as well and share ownership.

There are no citizenship requirements for LLC owners and LLCs can own and be owned by other LLCs, which, as you’ll see in the next section, is an advantage they have over an S-Corporation. LLCs are very flexible and you can write operating agreements and rules that allow you to be incredibly detailed on how your business is run or make it very very simple. Many of our customers like to choose the most simple entity that protects their assets and is not hard to run, and the LLC is the best choice every single time.

Also, LLC tax filing is simpler than a corporation’s.

Drawbacks to LLCs are very minimal. The only downside is if you ever want to become a venture-capital-backed company, you will almost always have to file a C-Corporation. However, most states will now allow you to convert an LLC to a corporation, so there’s really nothing to worry about. If you want to start your business and protect yourself as simply as possible then get started with an LLC, and when you’re ready to grow, convert it to a corporation.

Most people don’t know that Facebook started as a Florida LLC, and converted to a corporation later when they needed to.

What are the benefits and drawbacks of an S-Corp?

As we already discussed, a huge benefit of having an official business entity like an S-Corp is that it protects your personal assets in case you get sued during the course of business. An S-Corp. provides that protection, plus some added tax benefits as a “pass-through” entity.

The S in S-Corp simply means small. An S-Corp is limited to 100 shareholders and is not taxed at the corporate level. Whereas a regular corporation’s income is taxed twice—once at the corporate level and again at the personal income level—an S-Corp is just a pass-through entity that lets you pass corporate earnings on to yourself and your other shareholders, if you have any.

The drawbacks to S-Corps are that they are limited in size, you have to be either a US citizen or green card holder, and you can’t own other businesses or be owned by another business as an S-Corp, whereas an LLC will allow you to own and be owned by other businesses. S-Corp taxes are also more complicated to file than an LLC, and you’ll need at least a bookkeeper and probably an accountant to help you at tax time. Also, S-Corporations cannot deduct certain items that regular “C-Corporations” can like healthcare and travel. Ask your tax advisor for specifics.

Should I get a C-Corp instead?

The only reason to file a corporation is if you want to have more than 100 shareholders or attract venture capital. Basically, if you want a huge company, then it will need to be a C-Corp. But, if you’re starting out, it might be considerably cheaper and easier to start as an LLC until the time that you know you can attract those shareholders and funding. C-Corp structures, taxes, and filings are the most complicated of all, plus you get double taxed. Current taxation for corporations is 21%, and that’s before anyone gets paid and pays personal income tax. So, if your company makes $100,000 in its first year, the most you can make is about $79,000 before your personal income tax and any state taxes and fees. If you had chosen an S-Corp, you could have been paid almost all of that before having to pay any tax on it.

LLC vs. S-Corp Summary

If you’re just getting started, an LLC is probably the route for you. The setup, management, and taxes are easy. If you’re looking to save some extra money on taxes, you can consider actually adding an S-Corp election to your LLC, which will let your LLC file taxes as an S-Corp. But remember that if you do this, you’ll have to deal with more complicated corporate tax filings, and probably have to hire some help.

Next steps

Once you’ve decided on a business entity, you need to choose which state you want to file it in. 9 out of 10 times that will be your home state, but there are advantages to filing in other states, especially Delaware, Nevada, and Wyoming. Once you file, you’ll need to apply for your FEIN, which is basically your business’s social security number, and then open a business bank account. Check out our business startup checklist to see everything you need in one place.

Best of luck!

Did you know?

The corporate tax rate was just lowered to 21%.

A husband and wife can count as a single shareholder for an S-Corp.

If you go to get venture capital or funding, they’re almost certainly going to require you to get a Delaware C-Corporation. Delaware has very favorable laws for business.

Large corporations typically own and create other corporations to separate liability. For example, Amazon may file a separate corporation for a single distribution center and own that under another corporate entity.

Did you learn something from this article? Share it with friends who are interested in starting a business of their own, and subscribe to our newsletter below for regular business startup and management updates and education.

Don’t underestimate the potential of a side project (or “side hustle” as they’re commonly known): many multi-million dollar companies started as side projects. Twitter, Craigslist, Slack, Groupon all started as a side project.

Typical Side Company Setup

Most people simply work on their side project while they still have a job and then if it takes off or at least becomes “ramen profitable” (where you are able to at least feed yourself with your side hustle income) then they create a company (register an official business).  

However, there are risks with doing it this way, especially if you have many business ideas. First, since your initial work isn’t within an official incorporated business (a Corporation or LLC, an entity that is separate from yourself) you might expose yourself to liability.

For example, you might have some beta users or first customers of your side business but since you aren’t an incorporated entity yet, you may be held personally liable for the business and these customers may be able to come after your personal assets in a lawsuit (home, cars, etc.). This is the infamous “customer slipped on your driveway then sued you” nightmare scenario (or if your technical product messed up their computer or network, for example). Continue reading “How to Create a Company to Manage (and Protect) Your Side Projects”

I recently spoke to Allan Dib (the bestselling author of The 1-Page Marketing Plan), and he mentioned that changing your company name is like “performing heart surgery on a company”. After just going through a company name change, I tend to agree.

There are many moving parts and action items to think about when changing a company name. From choosing the name, to filing the business name change with the IRS (or whatever your national tax authority is), articles of Amendment with the state (each state you operate in and with every agency you’re licensed with) or filing a DBA name change (if you are organized as a partnership or sole proprietor).

We recently went through all of this with our recent name change so now I’d like to guide everyone with a business name change checklist to review and consider. Below we’ll review if you really need to change your name (or if you’re just thinking about changing your name), how to do the basic rebranding process and finally the checklist of action items.

Step 1: Do You Really Need to Change the Business Name?

I want to emphasize that while you, as the business owner, probably think the name of your company is very important, your client likely doesn’t give it much consideration at all (as long as it’s not inappropriate, offensive or wildly inaccurate). Think about it, do you really care what the name of your favorite vendor is? Likely not. However, for branding and positioning purposes, a well done name change and rebrand can really inject life into a company’s brand and marketing so it’s important to put some thought into it. Continue reading “How to Change Your Business Name (or Rebrand) including Checklist”

2017 was probably the most important in the history of MyCompanyWorks (formerly MyNewCompany.com) so we wanted to send an update to list what we accomplished and to let our clients and friends know what we’ve got planned for 2018 as well – big things coming!

2017 Accomplishments:

Rebranded as MyCompanyWorks

By far the biggest change is that we completely rebranded our company from MyNewCompany.com, Inc. to MyCompanyWorks, Inc. effective on November 2, 2017. This was a huge change and long debated. You can read our reasons for changing the name in this post but mostly, we outgrew the old name and are dedicated to becoming a complete small business platform to start, manage and grow your business – to make it WORK.

Launched the Startup Wizard

We launched our proprietary Startup Wizard to help our clients set-up their new companies quickly and completely and the feedback has been fantastic! Through one simple dashboard you can follow our interactive checklist to guide you through things like holding an organizational meeting, issuing stock, opening accounts, getting a logo and more.

Made the INC5000

MyCompanyWorks was very proud to have made its debut on the INC5000 in 2017. We’re very proud of our team and thankful to our clients for this great honor. We’ve managed to grow quickly but we’re also proud that we’ve also maintained our perfect A+ Ranking with the Better Business Bureau as well as a 4.8/5 rating on ShopperApproved. 

New Website Design

We launched a fancy new website design that has received great feedback. The design is modern, fully mobile friendly and looks fantastic!

My Account Dashboard Redesign and Improvements

Our My Account Dashboard was also fully redesigned and re-imagined into a beautiful command center to manage your business entity (or many hundreds of entities!). We also implemented many new features like PDF invoices, Task and Alerts for Annual Reports and we’ve recently launched an Account Summary that unifies all of your compliance tasks and billing reminders into one simple monthly email.

Launched our Referral Program

We’ve now given each of our clients a code and coded link that they can share with anyone and get paid for every order they refer to us (and manage their referrals in the My Account Dashboard). A great way to earn some extra cash for spreading the word.

2018 Goals:

We’re not resting on our laurels – we have many great things planned for our clients in 2018 including adding domain names/websites, business licenses and bank accounts to our suite of products that can be added to our business formation service.

Also be on the lookout for massive improvements to our ComplianceLock service, improvement to our Virtual Office service and hopefully, a new Delaware office as well.

Thanks again to our team and especially our clients for placing your trust in us since 2001!

The new tax law, called the “Tax Cut and Jobs Act” (TCJA), was signed into law on December 22, 2017 and is the largest overhaul of the US tax system since 1986. The bill is huge, and actually, in our opinion, makes many aspects of the tax code more complex rather than simpler. Some of the details are not entirely clear yet so we’re still learning more each day as the IRS implements various rules and decisions.

However, there is some very good news for small businesses (under a certain income and of a certain type of business activity) and any business that operates as a C-Corporation.

Continue reading “How the New 2018 Tax Law affects Small Business Owners”

Six years ago, a startup company was purchased in Ohio for $100 million, according to venture capitalist Mark Kvamme. Everyone involved in the deal was excited about it at the time – but they also acknowledged that it wasn’t likely to put a whole lot of money back into the State’s startup community. And that’s something Ohio desperately needed. Continue reading “Why Starting a Business in Ohio is a Very Good Idea – Especially Now”

Quick – what’s the first startup that comes to mind when I mention Chicago? If Groupon immediately popped into your head, you aren’t alone. The Chicago-based startup’s meteoric rise to fame (and subsequent fall from grace) has long defined Chicago’s startup scene – and the startup scene of Illinois as a whole. As you may have surmised, that’s not a good thing. Continue reading “Why Start A Business in Illinois, Anyway?”

Starting your own business can be pretty overwhelming, no matter where it’s situated. There’s so much to think about before, during, and after your organization gets on its feet. That’s why it’s so important to choose carefully when working out where you want to found your startup. Continue reading “The Main Reason You Should Start a Business in Wyoming”

If you’re looking at starting your own business, Colorado is one of the best choices. There’s a reason it’s home to over 50,000 small businesses – and that those businesses make up more than 90% of organizations in the state. Don’t just take my word for it, though.  Continue reading “Three Very Good Reasons You Should Think About Starting A Business In Colorado”

Nevada might be known as the immensely-popular tourist trap that is Las Vegas. However, from a business perspective, that’s far from the only thing the state has to offer. Home to such major enterprises as AMERCO, The Nevada Power Company, and Bally Technologies, Nevada could well be the best place you’ve ever lived and worked. Continue reading “Three Signs You Should Start A Business In Nevada”