| New entrepreneurs can wrestle with the question, | | | | old-style corporation is that stakeholders (like |
| "limited liability company vs S corporation." But the | | | | customers, employees or vendors) expect a |
| confusion and hand-wringing is unnecessary | | | | corporation rather than a limited liability company. |
| The Answer is Always "LLC" | | | | Sometimes this preference for a corporation |
| If someone really, truly has a choice between a | | | | flows from a feeling that a business with the |
| limited liability company and an S corporation, or | | | | name "Acme Incorporated" just seems more solid |
| Subchapter S corporation, the business can and | | | | than a business with the name "Acme LLC." |
| should be operated as an LLC. | | | | However a caution is in order here: Many |
| Here's why: A Subchapter S corporation isn't | | | | entrepreneurs use a corporation rather than an |
| actually a real corporation. Rather, an S | | | | LLC because they don't know enough about LLCs. |
| corporation is a tax accounting classification that's | | | | The preference for a regular corporation may |
| available to a variety of entities, including regular | | | | indicate the entrepreneur lacks sophistication. |
| corporations, limited liability companies, and several | | | | Reasons to Choose LLC Formation |
| other possibilities, too. | | | | Finally, it's important to note that as compared to |
| This reality--the fact that an S corporation is really | | | | a regular corporation, LLCs offer up some big |
| a tax accounting classification--simplifies the | | | | benefits. |
| decision if someone is trying to choose between | | | | For example, one big benefit already hinted at |
| an LLC and an S corporation. You can select the | | | | concerns the tax flexibility of an LLC. A limited |
| limited liability company option in this case. Why? | | | | liability company can be treated as a partnership, |
| Because you can elect to have the limited liability | | | | a sole proprietorship, a regular corporation, or an |
| company treated for tax purposes as an S | | | | S corp. |
| corporation. | | | | A common tax planning technique with LLCs is to |
| To elect Subchapter S corporation tax accounting | | | | keep things simple in the beginning by operating |
| treatment, you file a 2553 form with the IRS. | | | | as, for example, a sole proprietorship. Then, after |
| Some states (including Pennsylvania and New | | | | the business is running along profitably, an S |
| York) require their own separate state S election. | | | | election can be made. This flexibility is unique to a |
| One quick aside: If you don't make an S election | | | | limited liability company. |
| for an LLC, the LLC gets treated as "something | | | | Another big benefit of the limited liability company |
| else" for income tax purposes. An LLC with more | | | | concerns the safety of the ownership interest. As |
| than one owner is a partnership, for example. And | | | | a general rule, shares of stock in a corporation |
| a limited liability company with a single member is | | | | can be seized by creditors of the shareholder. In |
| treated, typically, as a sole proprietorship. | | | | other words, if some shareholder goes bankrupt |
| But "LLC vs S Corp" Question May Be Wrong to | | | | or gets sued, that shareholder's shares will |
| Ask | | | | probably end up in some other person's hands. |
| An important point needs to be made about the | | | | In many states, however, member interests in a |
| whole "limited liability company vs. S corporation" | | | | limited liability company can't be seized. Rather, |
| question, however. | | | | the best an outside creditor can do is get a judge |
| Sometimes, what people are really asking is | | | | to order that money the LLC disburses to the |
| whether a new business should be formed as a | | | | LLC member go instead to the creditor. These |
| limited liability company or as a regular old-style | | | | orders, called "charging orders," mean than a |
| corporation. In other words, the right question | | | | business or investment owned via an LLC is |
| may be "LLC versus corporation." | | | | actually much safer in many cases than a |
| As mentioned earlier, both LLCs and corporations | | | | business or investment owned via shares in a |
| can make an election to be treated as an S | | | | traditional corporation. |
| corporation. Accordingly, the decision to form an | | | | Note: Why the LLC membership interests can't be |
| LLC is totally disconnected from the S corporation | | | | seized is beyond the scope of this short article, |
| election. But there are still reasons to incorporate... | | | | but the rationale is that LLCs should be treated as |
| A Good Reason to Incorporate | | | | partnerships and the law can't force people to |
| Probably the best argument for a regular, | | | | become partners. |