When you’re forming a new business, you’ve got a lot of choices on how to structure it. The most popular is the sole proprietorship, which entails using the Schedule C form on your personal tax return to report profits.

But a sole proprietorship doesn’t protect business owners assets and has other drawbacks. That’s why many small businesses consider forming S corporations (S corps) and Limited Liability Companies (LLCs). Both of these structures allow earnings to be “passed through” to your personal tax return.

However, I always recommend forming an LLC over an S corp. Here are seven reasons to choose an LLC for your business structure.

1. LLCs are taxed the same as S corps.

When you form an LLC, you’ll have the choice of being taxed just like any other “pass-through” business, including:

  • S corps
  • Partnerships
  • Sole proprietorships

Assuming you choose an LLC, you’ll likely file the IRS Form 1065-Partnerships. Your profits will not be taxed at the company level and instead will “pass through” to your individual return. You will likely be able to take advantage of the Section 199A Qualified Business Income Deduction, which means that as much as 20% of your company’s income may not be subject to taxes.

2. LLCs are flexible and less expensive to operate

S corps are subject to corporate rules because they’re corporations. This means that if you form an S corp you will need to have a formal set of bylaws. You will also need a board of directors that will be required to regularly meet and produce written minutes. You don’t need these things with an LLC.

Instead, you’re only required to have an “operating agreement,” which can be as flexible as you need it to be.

3. You can have unlimited owners with an LLC.

Limited Liability Company

An S corp can only have up to 100 shareholders, and they must be U.S. citizens or residents. An LLC can have as many “members” as you’d like and there’s no restrictions on nationality.

An LLC can be owned by other S corps, C Corporations, LLCs, business partnerships, or sole proprietorships, but an S corp cannot.

4. LLCs offer the same liability protection as S corps.

For both LLCs and S corps, your personal assets are protected. There’s no difference between the two. Of course, a skillful lawyer may find a way to pierce the veil, but the risk is the same with either type of organization.

5. It’s easy to raise money as an LLC.

There is this myth that it’s easier to get financing if you’re an S corp versus an LLC. Maybe that was the case years ago, but I don’t see it anymore.

If you’re a profitable small business with a reliable forecasted debt maintenance plan, you’ll get the same interest from a bank regardless of your corporate structure. Most of the time banks will still require personal guarantees, too. If you’re seeking outside investors that want a more “corporate” structure, such as having a board, bylaws and other required documentation, that can be part of your LLC’s operating agreement.

6. Converting to a corporation isn’t difficult.

If an investor prefers that your company be an “Inc.” instead of an “LLC”, that’s doable.

Converting an LLC generally requires you to file a certificate of conversion. You’ll need to submit other documents both to the IRS and your state. There’s also a filing fee. While you may incur some accounting and legal fees, you won’t have to form a whole new entity or dissolve your existing LLC.

7. Having “Inc.” after your business’s title isn’t as important as it used to be.

Back in the day, having a company with an “Inc.” after its name had some sway. But in 2023, it’s now common to run into all-virtual companies or companies with a “.io” web address. It’s also common to see companies that identify themselves as LLC instead of Inc.

Some of this information may be different for your state, so please review my suggestions with an experienced accountant. Regardless, my recommendation is to use an LLC over an S corp for your business. To me, it makes sense to go the LLC route. It gives you the most flexibility and protection. And if you want to go all-corporate someday, it’s easy to do so.

Additional Resources

To learn more about this topic, you can read through additional resources from the Internal Revenue Service (IRS), below:

*This article is a high level comparison of these two types of corporate organizations that doesn’t take into consideration local requirements and the specifics of individual businesses. If you’re considering a change in structure you should work closely with your legal and financial advisors.

Ready to set up your LLC? Incfile has helped over 1,000,000 businesses launch since 2004. Learn how to get started by visiting Incfile’s website today.

Next Steps: Sign up for the Small Biz Ahead newsletter to learn more finance tips and tools to help your small business succeed.