One question I get asked is, “Which should I choose, an LLC or an S-Corporation?”
In the ultimate lawyer fashion, I usually respond with, “It depends.”
An LLC is a relatively new type of business entity. It offers a simple structure, limited liability, and pass-through taxation. However, it is not as flexible as a corporation. There are not as many options that are available for an LLC. In some respects, this is a good thing, especially when the business owners may not want to maintain an LLC like they would a corporation. A corporation may be “too complicated” or require too much detail. An LLC is the best business entity for most businesses. It is the business entity that allows them the most benefits with the least amount of hassle.
An S-Corporation, or a corporation with sub-chapter S status, is a “normal” corporation. The difference is that it has met stringent criteria the IRS imposes. They are fundamentally the same type of business entity. The S-Corp is only a tax status and not a different business entity. If the corporation no longer meets the criteria set by the IRS, the S-Corp group will be removed. The S-Corporation will be treated the same as a regular corporation subject to double taxation. The S-Corp status allows the corporation pass-through taxation like the LLC.
The decision to pick a corporation and then subject it to the criteria the IRS has set forth depends on the company’s goals. An LLC is probably the best choice if the company’s purpose is to stay private and never seek outside investors. The company receives the benefits without additional requirements.
However, if the company’s goal is eventually “go public,” it may be better to start as an S-Corporation. The S-Corporation tax status will allow the business to grow and have investors; if it grows sufficiently, it will lose its tax status. Still, it will have other benefits, such as the ability to file its initial public offering (IPO) to have additional capital.
Final Thoughts on an S-Corporation
Each business entity has its benefits; the key to picking the correct business entity is knowing your company goals. Once you understand your goals and choices, you will choose the right one. Selecting the right business entity can set you up for business success. It certainly will not solve all potential problems, but it will make running the business easier long term.
It is best to consult an attorney to make sure you pick the right entity for your company goals. Please schedule a consultation if you would like to discuss which is right for your business.
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