When starting a new contracting business, one of the first decisions you’ll need to make is what type of legal structure to organize under. The most common options are either forming a Limited Liability Company (LLC) or a Subchapter S Corporation (S-Corp). Both structures have their advantages and disadvantages, so it`s important to understand the differences before making a decision.

Limited Liability Company (LLC)

An LLC is a legal entity that combines the limited liability of a corporation with the operational flexibility of a partnership. The LLC structure protects the personal assets of the owners from any business-related liabilities. This means that if the business runs into financial trouble, the owners’ personal assets, such as homes and vehicles, are not at risk.

An LLC also provides more flexibility than a corporation when it comes to taxes. The LLC itself does not pay taxes – instead, the profits are passed through to the owners, who then report the income on their personal tax returns. This is known as pass-through taxation.

One downside to forming an LLC is that it can be more difficult to raise capital. Investors may be hesitant to invest in an LLC because they cannot buy shares of the company, as they would with a corporation. Additionally, an LLC may be subject to self-employment taxes.

Subchapter S Corporation (S-Corp)

An S-Corp is a type of corporation that elects to be taxed as a pass-through entity, meaning that the profits and losses are reported on the owners’ personal tax returns. Like an LLC, an S-Corp provides limited liability protection for owners’ personal assets.

One advantage of forming an S-Corp is that it may be easier to raise capital. Investors are more likely to be familiar with the corporate structure and may be more willing to invest in an S-Corp.

However, forming an S-Corp can be more complex and time-consuming than forming an LLC. S-Corps must file additional paperwork with the Internal Revenue Service (IRS) and state authorities. Additionally, S-Corps may be subject to more regulations than an LLC.

Which should you choose?

Choosing between an LLC and an S-Corp depends on your personal circumstances and the goals of your business. If you are more concerned about flexibility and simplicity, an LLC may be the better option. But if you are looking to raise capital or plan to go public someday, an S-Corp may be the way to go.

Before making a decision, it is advisable to speak with an attorney or accountant who specializes in small business formation to help you select the best structure for your needs. By choosing the right legal structure, you will be setting your business up for success in the long run.