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Picking the Right Entity for Your Small Business

As business lawyers, there are few things more rewarding than working with Gulf Coast entrepreneurs and others who are pouring their heart and soul into building and growing a business. The hope, of course, is that all of that hard work and investment will be rewarded with success. The nightmare is that you expose your personal finances to significant risk and tax liability that can bring your dreams crashing down. One of the ways to minimize those risks and protect yourself is to pick and form the right business entity for your new or expanding enterprise.

For small businesses in Mississippi and growing enterprises across the Gulf Coast, this choice often comes down to two potential corporate structures: a limited liability company (LLC) or an S-corporation (often called an “S-corp”).

As alluded to above, perhaps the most fundamental reason business owners form LLCs or S-corps is to protect their personal assets from business creditors or other liabilities arising out of the operation of the business. Both of these entity types can accomplish this crucial goal, giving owners much needed peace of mind. However, that protection can be lost if the business owners conduct their affairs in such a way as to render the company a mere “alter ego” of its owners or if they engage in fraudulent conduct. Additionally, both entities provide the benefit of treating your business income as your personal income for tax purposes.

How LLCs and S-Corps are Different

While both LLCs and S-corps provide the benefit of protecting personal assets, there are several key distinctions between LLCs and S-corps. A few of those differences include:

1. Taxation

Both LLCs and S-corps are “pass-through” entities for tax purposes, which means business profits pass through the business entity and get taxed as the personal income of the owners. If you run a single-owner LLC, you are taxed like a sole proprietorship, which means you can simply attach a Schedule C form to your personal tax return. If your LLC has several owners, you can choose to be taxed as a corporation or a partnership. In an S-corp, the corporation’s income is reported on the shareholders’ personal income taxes, based on their percentage of shares owned, regardless if they received distributions of the corporation’s income.  Because the tax implications of an LLC versus an S-corp are complicated and quite comprehensive, it is important to work closely with an experienced Mississippi business attorney before deciding which entity works best for your business.

2. Allocation of Income

If you have others who will have an ownership share in the business, you will have to figure out how income will be allocated between you and your partners. S-corps don’t give you much of a choice, as income must be distributed evenly among all owners regardless of how much labor or money each owner has contributed to the enterprise. In an LLC, however, you can distribute income however you wish.

3. Corporate Formalities

One of the appealing things about an LLC is that, as a general rule, fewer corporate formalities are required than in S-corps and certainly fewer than in regular corporations, or C-Corps as they are sometimes known. As noted, however, failure to treat the LLC as a distinct entity by commingling funds, undercapitalizing the company, failing to hold meetings, etc. can result in the loss of that all-important personal liability protection. In Mississippi, LLCs are not required to have written operating agreements, and in the absence of any agreement on a specific issue, Mississippi’s LLC Act provides default rules that will be applied to a variety of corporate governance issues. Even though a written agreement is not required, it is strongly recommended that a written operating agreement be drafted and signed by all members to clarify the parties’ rights and obligations and avoid future conflicts as to its provisions.

4. Ownership Restrictions

An S-corp can have no more than 100 shareholders. By contrast, LLCs can have any number of owners and can even be owned by corporations and other LLCs.

There are numerous other nuances and distinctions regarding ownership, management, and operation of both LLCs and S-corps, and there are other types of entities available as well, including general partnerships, limited partnerships, and specialized partnerships for the provision of professional services. Our business lawyers understand that every business is different and that the goals and concerns of every business owner are unique. We work closely with our clients to evaluate their specific situation and determine which business structure will best set them up for success and growth.

Rushing & Guice, P.L.L.C: Mississippi and Gulf Coast Business Lawyers

At Rushing & Guice, experienced business formation counsel is a phone call away. Call us at (228) 374-2313 or fill out our online form to arrange for a free, limited initial consultation. We look forward to hearing from you, and look forward to the opportunity to serve as your attorneys.

This website has been prepared by Rushing & Guice, P.L.L.C. for informational purposes only and does not, and is not intended to, constitute legal advice. The information is not provided in the course of an attorney-client relationship and is not intended to substitute for legal advice from an attorney licensed in your jurisdiction.