One question that 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.”
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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 have 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 rather 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 status will be removed. The S-Corporation will be treated the same as a normal 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 goals of the company. If the goal of the company is to stay private and never seek outside investors, then an LLC is probably the best choice. The company receives the benefits without the extra requirements.
However, if the goal of the company is eventually “go public” then it may be better to start as an S-Corporation. The S-Corporation tax status will allow the business to grow and have investors and if it grows sufficiently, it will lose its tax status but it will be able to 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 right business entity is knowing your company goals. Once you understand your goals and choices you will pick the right one. Picking 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 are picking the right entity for your company goals. If you would like to discuss which one is right for your business, please schedule a free consultation.
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