When starting a business in Hawaii, you have several options to choose from regarding the business structure; however, the two most common business structures are the Limited Liability Company (LLC) and the S-Corporation (S-Corp).
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The decision to choose between an LLC and an S-Corp necessitates evaluating the specific needs of your business; this article will provide an overview of both business structures, their characteristics, advantages, and disadvantages to assist you in making a sound decision.
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Overview of LLC and S-Corps
To clarify, both LLCs and S-Corps are state-recognized business entities functioning as a separate legal entity from the business owners and shareholders. However, they offer different degrees of legal and financial safety, benefits, and requirements.
LLC
A limited liability company, commonly referred to as an LLC, is a flexible business structure that combines various legal protections, including liability protection with simplicity and ease.
In Hawaii, establishing an LLC requires filing articles of organization with the Hawaii Secretary of State and assigning a registered agent. LLCs can contain one or numerous owners, referred to as members, who get to choose how their LLC is taxed, either as a sole proprietorship, partnership, or S-Corp.
S-Corp
On the other hand, S-Corporations are the opposite of the LLC structure, which refers to how a business is taxed rather than its business structure.
In other words, an S-Corp is not a business structure, but it needs to have filed Articles of Incorporation to become a corporation. It requires shareholders to elect S-Corp status with the IRS, allowing the business to be taxed similarly to a partnership.
LLC vs. S-Corp: Differences and Similarities
Both the LLC and the S-Corporation offer various legal and financial safety benefits, such as limited liability protection, deductible expenses, shielding from double taxes (corporate and individual income), among other tax savings.
The table below provides a summary of the differences between LLC and S-Corp in several key areas:
| | LLC | S-Corporation |
| -------- | -------- | -------- |
| Ownership and Legal Protection | Members cannot be personally liable for business debts and obligations.` ` | Shareholders are not generally held accountable for corporate actions, unless upon an exceptional course of events |
| Tax Treatment | LLCs are known as pass-through entities, where profits and losses pass to members’ tax return and are subject to self-employment taxes. | S-Corps are federal income tax entities, and profits and losses pass to shareholders` `personal tax returns to avoid double taxation. |
| Formation and Administrative Requirements | LLCs in Hawaii requires filing of articles of organization, creation of operating agreement, and obtaining of necessary business permits and licenses. | S-Corparation requires filing Articles of corporation, is subject to state corporate laws with regular shareholder and board of directors meetings` |
| Exit strategies and access to Capital | LLCs allow for business continuity in the event of loss of member | S-Corporation raises capital easily through investment and may issue different classes of stock, allowing for various investors. |
From the table above, LLCs is designed for greater freedom and flexibility due to fewer corporate formalities and requires minimal administrative and economic requirements. S-corporations are attractive to business people looking for more exceptional funding chances and long-term business operation.
Conclusion
Ultimately, choosing between the LLC and S-Corp will depend on your business's specifics, such as tax status, future financial needs, degree of professional support, flexibility, availability of funds, and level of organization.
To sum up, an LLC can be suitable for entrepreneurs seeking limited liability protection, simplicity, and greater creative control on their businesses. However, those who anticipate long-term expansion, equity financing options sources, or a stable business plan should consider meeting all the formal S-corporation administrative and legal obligations.
Consulting with a qualified attorney and an accountant who understands your personal business objectives in Hawaii can help lead you to a smart balance between LLC or S-corporation.
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