One of the most often-asked questions we get is "should we organize as an LLC or S-Corp"?   One of the most common questions WE ask of new business clients is "Hmmmm, tell me why you decided to organize as an S-Corp"?   It is an important question warranting some real study when you are contemplating your new business or considering changing your organization type.   We could dedicate an entire website to organization considerations, but here are a few basic items ..............

Advantages of LLCs

• Is a pass-through entity like a partnership or S-Corp and avoids double taxation.
• Not limited to one class of stock.
• Number of "members" (owners) is not limited like in an S-Corp.
• Any entity can be an owner.
• Profits & losses can be allocated other than just on ownership percentages.
• Liability protection for all members even if an LLC member participates in the management of the business.
• Almost always have tax-free contributions of property to the LLC.

Disadvantages of LLCs

• Owners cannot be paid as employees and are subject to self-employment tax.
• Owners, not being employees, cannot participate in some employee-benefit programs.
• Cannot survive a 50+% sale of equity interests.

Advantages of S-Corporations

• Unlike C-Corporations, profits and losses pass through to the shareholder so there is no double taxation.
• Can set a "wage" for owners who are working in the business.  Setting the wage at a fair value permits all profits to be excluded from self employment taxes.

Disadvantages of S-Corporations

• The number of owners must be all of only one-type of stock.  There is no opportunity for having both common and preferred stock.
• All profits (and losses) must be distributed pro rata in the same proporations as ownership interest.
• There can be no more than 100 owners.
• Ownership of S-Corporation shares is limited to only individuals, estates, certain trusts, and certain charities.  Corporations are not permitted to be owners, so it is difficult to have parent companies and related companies.
• Must be a "domestic" corporation.  All owners must be U.S. U.S. citizens or residents.
• Unfavorable dissolution characteristics.
• Loan guarantees do NOT constitute additional "outside basis".
• While it is an advantage that income is not subject to "double taxation" as is the case with a C-Corporation, the disadvantage is that the income is taxable to the shareholder even if it is not distributed.