Should I start an LLC or S-Corp?

Dear #MoneyChat:

I just started a small online business and I want to legitimize it. Should I start an LLC, S-Corp, or consider another legal structure for my business? Is one better than the other?

Dear #MoneyChatter:

One option is not really better over the other but it all depends on your situation, including your business goals, tax preferences, and legal considerations. Here's how you can look at the three most common options:

• LLC (Limited Liability Company): Offers flexibility in management and taxation, limited liability protection, and fewer formalities. It's best for small to medium-sized businesses seeking simplicity and flexibility.
• S-Corp (S Corporation): Provides limited liability, potential tax savings through pass-through taxation, and the ability to avoid self-employment taxes on distributions. It's better for businesses that can adhere to stricter IRS regulations and want to optimize tax savings.
• C-Corp (C Corporation): Ideal for businesses planning to raise significant capital, issue stock, or go public. It provides strong liability protection but involves double taxation (corporate and personal level).

A sole proprietorship is probably what you're doing currently which is the simplest structure and has no formalities. But this can be risky as your business grows since it doesn't offer liability protection and your business income is taxed as personal income.

I'm not sure what your business involves, but a lot of people start with an LLC and if they want to later on they switch to an S-Corp. Talk to your tax professional about your personal tax implications for having an LLC vs S-Corp to narrow down which one is better for your specific business and be sure to weigh the pros and cons of each.

xoxo

Your Financial Coach,

Dorethia

P.S. - There's no one-size fit-all business structure for everyone. Consider your business goals and finances and run ideas by your tax professional to ensure you're making the best choice.