Meet NAME’s lawyer, Edwin Slagsvol better known as Whit, from Sweetgrass Lawyers in South Carolina. Whit has offered to give NAME members 15% off on any services pertaining to law and setting up an easy LLC for only $850 (plus filing fees). He can do everything from trademarks, to contract drafting and negotiations, to entity restructuring and reorganization. Whit can help anyone, regardless of where they are located in the United States. He can handle some manner of dispute resolution, but will not be able to file any lawsuits unless they are in South Carolina. Referrals are available upon request. Email firstname.lastname@example.org to connect and keep an eye on the blog for valuable legal and business building advice.
Here we will discuss the difference between choosing an LLC and S Corp and the right fit for your small business.
Q: What is an LLC?
A: An LLC is a limited liability company. It is a form of business entity that is somewhere between a general partnership and a corporation. LLCs offer more liability protection than a general partnership and are less expensive and formal to maintain than a corporation. LLCs, like some other entity forms, are “liability shields” for the business owners, known as members of the LLC. Because an LLC is a distinct entity from the owners (like a corporation), the assets and liabilities of the LLC belong to the company, not the individual members. In the event of a lawsuit or accident of some sort that results in a verdict or some form of liability being imposed against the company, the personal assets of members are protected, as the liability belongs to the company not the owners. In a general partnership, for example, each partner is jointly liable for any liabilities of the partnership, which means that personal assets are exposed. In order to maintain the liability protections, certain steps and formalities must be taken, for example, separate bank accounts and expenses must be maintained.
Q: What is an S Corp?
A: An S Corp is an LLC that has elected corporate status for taxation purposes. An LLC can elect to transition into an SCorp once it is advantageous for tax purposes to do so. That will require a conversation with a CPA or tax professional. S Corps allow owners to be employees and therefore can take a wage, as opposed to an LLC issuing distributions to its owners. In an LLC, each member is taxed individually. At a certain point, the member’s tax exposure is limited by taking a wage as opposed to LLC distributions.
Q: How do I know which one if right for my small business?
A: It is never a bad idea to start with an LLC. Once a CPA or tax professional has advised that there are benefits in transitioning to a S Corp, that is when you will know. Essentially it comes to how much you ear profiting from the business. At a certain threshold (talk to your CPA) it becomes better to transition to an S Corp.
Q: Which one offers more protection if I were to be sued?
A: So long as all corporate or LLC formalities have been maintained, separate bank accounts, no commingling personal and business funds or expenses, etc, then they are the same level of personal asset protection. Also, always have insurance, whether it is general liability or some other more relevant insurance for your business.
Q: Why would I need one in the first place, couldn’t I just work under my own name?
A: If you work under your name with no entity formation, you risk personal exposure to liabilities. Take for example Bozo the Clown vs. Bozo the Clown LLC: Bozo the Clown shows up to a kids party, and in a daring attempt to wow the kids by spitting fire, he burns Little Jimmy. Jimmy’s parents sue Bozo. Bozo doesn’t have insurance and the lawsuit results in a judgement against him. He now has to sell his home in order to pay for Little Jimmy’s damages. If Bozo has a partner in the business, Jimmy’s family can also come after them to satisfy all or any portion of the judgement. Now, Bozo the Clown LLC has a similar party trick and they arrive at a neighboring home and perform their daring fire display for the kids. Little Brad gets burned, sadly. Bozo LLC, however, filed the articles of organization, filed for an EIN with the IRS, has a bank account that all revenue flows into, and an executed operating agreement with the company details. The lawsuit results in a verdict judgement against Bozo LLC, but Bozo himself is protected from that judgement and doesn’t have to sell his house. The LLC may have to file for bankruptcy proceedings, but the personal assets of Bozo and any other owners are protected. (NAME Entertainers does not encourage fire spitting clowns however we do offer clowns and more entertainers a membership and insurance coverage!)