Which is better; a limited liability company (LLC) or a corporation (S-Corp). The answer is individualized. An LLC has more structure than a partnership or sole proprietorship. An S-Corp is probably even more formal. Both can protect your personal liabilities from seizure in the event your company gets into trouble with creditors. So, what are the differences between these two important business designations?
LLC vs. Corp—Which is Better?
An S-Corp is actually a tax designation while an LLC is a type of business. Owners of LLCs can select their method of taxation as a single-member entity tied to your personal return or as a multiple-person partnership. LLCs can be taxed also as a C-corporation, which is another type of business designation that has an unlimited number of shareholders. Really, a C-Corporation is ideal if you’re looking to go public.
If you’re a franchise owner, you typically choose an LLC designation or possibly an S-Corp. The goal of both designations is to limit your liability and protect your personal assets when starting a business.
LLCs have fewer recordkeeping requirements than corporations. Both designations are filed via paperwork in your state.
To become an S-Corp, you must meet all the guidelines set by the IRS and then register as either an LLC or a C-Corp. S-Corporations. The owners of a corporation are known as shareholders. The S-Corp issues shares to these stakeholders, with the number corresponding to the percentage of ownership.
LLC business owners are called members. Each member owns a percentage of the business. Legally, this is known as a “membership interest.” There are legal restrictions for transferring membership interests.
Corporations have rigid legal requirements for their management structures. There must be a board of directors and officers who run daily operations. They must have annual shareholder meetings, make annual reports, and have more requirements around recordkeeping than an LLC.
LLCs are run by their members. Members have formal business titles and the LLC has less formal recordkeeping requirements. Some states require LLCs to make annual reports, others do not.
Which is Better for a Franchise: S-Corp or LLC?
Your franchise may have requirements related to your legal designation. However, generally, there are some benefits to an LLC that might make it more ideal for your initial business launch. For example:
- LLCs do not require board meetings and have less complicated accounting and bookkeeping requirements.
- LLCs have flexible ownership rules.
- LLCs can take advantage of pass-through tax status that could save you tax dollars.
- LLCs have a less strict hierarchy for management titles.
If you’re a fledgling franchisee, an LLC is easy and inexpensive to set up and maintain the legal structure. If you’re looking for financing to cover franchise fees and start-up expenditures, most banks require the LLC designation.
We recommend consulting with your tax advisor or CPA to determine which structure is best for your new business. If you’re interested in talking with Gecko Hospitality about our franchise model, simply contact us to talk about your options.
