Energy consumption is a burning issue for common home users and commercial consumers alike. Energy consulting can help optimize the use of energy resources and significantly improve their efficiency which will eventually result in financial savings for the consumers. Meanwhile, for large-scale service providers, it’s a profitable business that can bring millions of profit.
Want to get involved in this business and stand on the verge of opening an energy consulting company? Are you pondering the question of which legal structure will best work for this type of activity? This business calls for a legal entity, and most beginner entrepreneurs leave the idea of operating as sole proprietors behind. So, most likely than not, you’ll end up choosing between a limited liability company and an S-Corporation.
What Is an LLC?
Relatively new to the modern business environment, a limited liability company is a legal structure that hits a sweet spot between corporations and sole proprietorships or partnerships. It embraces the best features of both worlds to match modern business realia.
LLCs are separate legal entities that require state filing. They come with limited liabilities of corporations, yet, without the corporate regulatory hassles. This entity type is much easier to establish and manage. Unlike corporations, it offers more flexible profit distribution options.
In the eyes of the IRS, LLCs have no distinct classification and are taxed either as sole proprietorships or as partnerships depending on the number of members.
A sort of hybrid between disregarded and incorporated entities, an LLC structure perfectly fits the needs of startup projects and growing businesses alike.
One of the best states in the U.S. to start your own llc is Wyoming:
- Corporate tax rate: 0%
- Individual income tax rate: 0%
- Sales tax rate: 4%
What Is an S-Corp?
Many beginner entrepreneurs think that this is a separate type of entity. However, it’s rather a tax status than a separate legal structure. As the name suggests, a Subchapter S Corporation has a corporate legal framework. When establishing a corporation, you’ll register a C-Corp by default. And then, you can elect S-Corp status for your venture by filing it with the IRS.
An S-Corp tax status allows for paying the company income taxes on individual tax returns of its owners, thus, eliminating the dual taxation burden of corporations. At the same time, it still retains the corporate legal framework.
Notably, to qualify for an S-Corp, your company should observe certain requirements:
- It should be a legal entity formed and operating in the US;
- The number of shareholders should be no more than 100 persons;
- Only individuals and some types of trusts are allowed to be S-Corp shareholders;
- The company should issue only one type of stock.
S-Corp vs LLC: Top Benefits They Offer for Energy Consulting Companies
Though different legal structures, LLCs and S-Corps share many common features and can offer the same benefits to those who seek to set up an energy consulting firm:
- Liability Screen: Both entity types split individual and business liabilities and will securely shield your individual funds and property from being used to settle company problems. Separate from you, your enterprise is responsible for its debts and financial commitments with its own assets;
- Pass-through taxation: Whatever your choice, you’ll enjoy the benefit of being taxed as a disregarded entity and avoid paying corporate income taxes at an enterprise level. Instead, the enterprise revenues will be distributed between the owners and taxed as their individual earnings. The same is true for company losses;
- Solid market image: With an S-Corp or LLC, you’ll get an independent entity that will help you create a professional market image for your venture and gain much higher credibility among potential customers, which is important for bringing your energy consulting firm to a higher business level over time;
- Better financing opportunities: At some point, you might need capital financing to boost or maintain your business growth. Incorporated entities are much more attractive in this concern since they look reliable and trustworthy in the eyes of banks, credit agencies, and other financial organizations. Likewise, they make it much easier to engage private investors or sponsors.
S-Corp vs LLC: Differences to Consider for Energy Consulting Companies
Looking very similar at a glance, LLCs and S-Corps are by no means the same. The key differences that might impact your energy consulting business and that you should be aware of appear are in the following areas:
- Ownership: LLCs come up with a great degree of flexibility in this sphere allowing for an unlimited number of members that could be US and non-US residents and physical or legal entities. S-Corps, on the other hand, should stick to multiple IRS restrictions limiting the stock issue and membership options;
- Management: LLCs can be either owner-managed or manager-managed giving you quite a bit of leeway on this aspect. Meanwhile, S-Corps require a strict management structure that keeps shareholders away from ongoing company management;
- Profits distribution: In a corporation, profits and losses are allocated pro-rata to the owners’ shares in the company equity. LLCs allow for distributing revenues as the members deem necessary;
- Self-employment tax: With an LLC, you are considered self-employed and are exposed to self-employment charges. An S-Corp allows treating an owner as a company employee and reducing the taxable income for the salary amount before distribution. In this case, the owner is free from self-employment tax payments. More than that, shareholders will get certain privileges on dividend taxation.
Consult With an Expert
When choosing between these two entity types, you should bear in mind that one way or another corporations involve more formalities and higher formation and maintenance expenses while LLCs are more straightforward, easier to set up and offer more flexibility in all spheres. Besides, if you want S-Corp tax benefits, you can elect this status for an LLC without switching to a corporate legal framework.
While you are free to decide on your own which entity is a better choice for your future enterprise, we insist that you consult a business consultant or tax expert beforehand that will provide professional recommendations to work out a perfect formula for your specific needs.
Bottom Line
In our opinion, at the beginning of your business journey, an LLC structure will match your smaller consulting business to a tee and will be capable of catching up with its step-by-step growth. You only need an S-Corp if you have an extended employee network and multiple stakeholders on your list.
