Another nice perk of the S-Corp is the 'Corporate Disbursement' -- a fluid means of taking money back out of the company for whatever reason.

It's good to see this particular reason for it. So if you are planning to have investors in the future it would be a good idea for an S Corp.

I still think that it is better in the short term to go for ease of implementation and this is exactly where the LLC counts. If you reach the point where you want investors, then go do the conversion from LLC to Inc and accept the cost at that point.

At early stages of a company the simplicity of an LLC keeps everyones focus on the business and not on future paper millions.

It's the same thing as scaling your web service. Do you set up an expensive clustered environment while the only people who visit your site are yourselves, your mothers and a stray uncle somewhere. Is it really worth the time, effort and cost of setting up a super flexible "enterprise" when you're not even sure you have a business yet?

As I have blogged about before there are some good reasons for when you should use C or S Corps, but unless you fit those reasons exactly I think it better to stick with LLC. One of these reasons it would appear is venture funding.

Just blogged a further piece called "Why the LLC is the Ruby on Rails of Legal Entities" which expands on my previous comment here.

This is fine everywhere except in Texas because down here, an S-Corp is subject to franchise tax and an LLC owned by a limited partnership is not.

So if your business makes money, you can avoid a 4.5% tax by avoiding the S-Corp structure.

Hopefully most VC's realize the gains of a more tax efficient structure signals an entrepreneur who isn't designing his business to sell it to VC's, but it intent on making money.

Which would you rather invest in?

Good comment Jeb. However, if I remember correctly (it's been a while since I had a Texas company), the franchise tax in Texas for a company that is not making money is very small (

On the other hand, if you are NOT going to raise VC money and you have a profitable business, I agree that the LLC route is a good one.

My comments have been focused on companies that are considering raising VC money in the near future (within 24 months).

I'm the co-founder of a two person (at present) startup and right now we're making the decision on the company's structure.

We're boot-strapping and have income for the current tax year (stock sales, spouses currently working), so it seems like the ability to right-off the pass-through losses from the startup as an LLC appears to be a good vote in favour of an LLC.

The issue comes in that we expect to start looking for funding and investors will want a C-Corp.

The answer would appear to be: start as an S-Corp now, and flip the C-Corp switch when needed, but I'm a non-US citizen so an S-Corp is out of the question.

Key question: Do investors look unfavourably on a startup formed as an LLC (the "why the hell did you do that?" factor), but recognize the fact that we will need to switch to a C-Corp when needed to put financing in place?

I.e. Will investors think we're bozos for starting as an LLC, even when there is a valid reason (or two for it)?

Steve - in your case, I'd recommend an LLC given that (a) you are making money (and would benefit from better tax treatment) and are "expecting to look for funding" which certainly isn't guaranteed any time soon. I don't think a rational investor will look unfavorably on the LLC in your case since you are making money and can easily explain why an S-Corp won't work for you given the foreign ownership.

I currently have an s-corp and my associate has an LLC. We're talking about forming one company. If I make him a full partner, is it possible to take distributions in unequal amounts, i.e. not 50/50. We both work for an hourly rate and it's possible that we'll work a different # of hours or have a different rate. We want a set salary and take distributions.

Anthony - this shouldn't be an issue. You should be able to draw a salary and make discretionary payments to each partner at different levels. In the case of either an S-Corp or an LLC, you'll have an equity interest, but you can pay a "bonus" independently of ownership. You'll be taxed at the ordinary income tax rate in any scenario, whether you call it a bonus, salary, dividend, or distribution.

My question is...

If a company was incorporated as a "C" corporation and then switches to an "S" Corporation, how long must it wait before any sale would be protected under the tax implication of the "S" Corporation?

Many thanks in advance for assistance on this...

Mitch,

I'm not an expert on exempt organizations, but I do know that certain trusts, certain pension plans and more regularly foreign investors are very concerned about UBTI issues. In our particular case, our side funds (made up of entrepreneurs, individuals and foreign investors) are particularily sensitive to this issue. Most venture funds do have side funds with these types of investors and in order to keep pro rata investment allocations amoung the different sub funds, normally don't invest in any entities that will generate UBTI.

How come no one mentions the self-employment tax? Distributions from LLC's are subject to the self-employment tax - distributions from s-corps are not. This is a relevant factor.

Tim - that's a good question - I don't have an immediate answer because I'm not sure about the difference in self-employment tax between and S-Corp and an LLC. I've always viewed the self-employment tax as "noise" in the system (I used to pay them at my first company), especially given the differential in base tax rate. But - it's a good question and one worth me looking into.

Just got a good read on that at http://smallbusiness.findlaw.com/business-structures/corporations/corporations/corporations-compare-llc(1).html

Excerpt:
For an S corporation, the rules on the self-employment tax are well established: as an S corporation shareholder, you pay the self-employment tax on money you receive as compensation for services, but not on profits that automatically pass through to you as a shareholder. For example, if your share of S corporation income is $100,000 in 2004 and you perform services for the corporation reasonably worth $65,000, you will owe the 15.3% self-employment tax on the $65,000 but not on the remaining $35,000.

By contrast, the rules for members of an LLC are murky. Proposed IRS regulations (which Congress has placed on hold) would impose the self-employment tax on an LLC owner's entire share of LLC profits in any of the following situations:

* The owner participates in the business for more than 500 hours during the LLC's tax year.
* The LLC provides professional services in the fields of health, law, engineering, architecture, accounting, actuarial science or consulting (no matter how many hours the owner works).
* The owner is empowered to sign contracts on behalf of the LLC.

Until the IRS clarifies the rules on self-employment tax for members of an LLC, you should assume that 100% of an LLC member's earnings will be subject to the tax. Until the tax rules are clarified, an S corporation shareholder may pay less self-employment tax than an LLC member with similar income. You'll need to decide if this potential tax saving is enough to offset such LLC advantages as less formal recordkeeping and flexibility in management structure and in the method of distributing profits and losses.

I found an article that compares llc with an S-corp. Except for all of the formalities that an llc allows you to bypass, another difference between the 2 is the fact that there is no self employment tax on dividends paid to shareholders for an S-corp, while for an LLC there is a self-employment tax on the total net income.

What do you think of that?

Thanks,
Vladimir
http://www.powerhomebiz.com/vol136/structure.htm

My wife has an S-Corp that is going to be very profitable this year. Is it better for her to pay herself a bonus, or a dividend? The only 2 shareholders are she and I.

-Brandon

Also a S-Corp does not pay self-employment tax on the remaining portion of the profit at the end of the year in the form of Social Security & Medicare 15.3% as a LLC would have to.

I have a question along these lines. I'm a minority share holder in a U.S. LLC. I am neither a U.S. resident or citizen. The accountants are suggesting to the primary CEO that we need to change over to an S-Corp to be more attractive to outside investment.

After doing some reading, an S-Corp doesn't really make us much more attractive than an LLC. Is that correct?

Since an S-Corp can't have foreign ownership they are trying to work out some way that I get my share in liquid cash if we ever sell. Which doesn't interest me as that doesn't give me any value if we survive forever as a private company.

Thanks for any insight. I'll probably be talking to lawyers and accountants about this anyways.

Thanks for any insight.

I echo your thoughts. I'm not sure why a S-Corp would be better. You can't sell preferred stock out of an S-Corp and this is the security that most investors want to purchase. While LLCs are not optimal either for outside investors, for individuals and angel investors it normally is preferred to a S-Corp. While I don't know your particular circumstances, it really sounds like a C-Corp is for you. Foreign investors like yourself will have no issues and if you are seeking professional funding, you'll be able to sell preferred securities.

As an S-corp, may I start a College Scholarship Fund? We have less than 100 employees. Are the founder's children able to use this fund, as well as employees, etc..

I'm considering an LLC as a way to start up my race team (U.S.Drift Pro Am, if you're wondering) and my biggest problem, like everyone else, is money. I'm considering loans or investors as a way to gain the money along with sponsorships from companies willing to pay for the space, stunt driver, and spokesperson (harder than it sounds, probably have more luck with a bank).

If you want more background on what I'm doing, just email me at jbanner@gmail.com

I was told by a tax advisor that any distributions paid to myself in the current tax year would be classified as wages and subject to FICA and Medicare. The only way to get around it is to wait until 2008 to pay myself the distribution (then it would have been taxed only Fed and state tax in 2007 but not FICA and Medicare since it's still in the corporate account). Everything else I read states that the distribution CAN be paid in the current year and as long as I am paying myself a 'reasonable salary', the distributions can be made monthly and not subject to FICA and Medicare. Which is right ??

I can't give you tax advice - you need to follow the advice of your attorney / tax advisor. Sorry I can't be more specifically helpful.

I have question regarding changing from a C corporation to an S corporation in Texas.

In 1999, we incorporated Corp X, an S corp. In 2004, X sold some shares to corp Y. Therefore, X became a C corporation.

Now, Y wants to sell its shares back to the individual shareholders of X and bail out. X will then become eligible to be an S corp.

My CPA tells me that, in Texas, it is not possible to switch a C to an S until it has been a C for at least 5 years. Which means Y cannot sell the shares until 2009. This seems absurd.

I have not read any such regulation on google. Can someone comment or point me to a good reference document/person/CPA?

Thanks.

I am setting up a LLC for my small business and am wondering what the advantages are for choosing to be taxed as an S corp vs. a partnership? Can anyone give me some color on this?

Thanks.

Brad,

What about an LLC treated as a C-corp for tax purposes? Multi-member LLC's will be taxed like a partnership by default, but should (correct me if I'm wrong) be able to "check the box" to be taxed as a C corp or S corp. Shouldn't this function exactly the same tax-wise as a traditional incorporated company that you are advocating in your post?

Okay, here is my situation...we are currently an LLC and have been profitable for the past 15 months. Mgmt has made the decision to switch to a c-corp. We are currently working through some of the tax implications. One being that our liabilities must be lower than our asset base so that we qualify for a 451 transaction (tax free transaction. So we are looking at our liabilities to see exacly how much we need to pay in order to take advantage of the 451. What other specific issues should we take a look at?

My situation:

Recently dissolved a c-corp and started a like named LLC. Want to start a different LLC (/Different entity/Business name/bank account.) How is this done? Is the new LLC and the original LLC linked together?
Does:
***
Each one has its own TIN - then a K1 reports on the business and the parent LLC reports all the K1's
***
make sense to you? What does the above---MEAN?
Please help. How do I start another LLC?
Thank You.
Al Ritondo

What are the pros and cons of converting a c-corp to an S?

Our family recently bought back nearly all stock in the company from outside shareholders.

i currently own an s-corp for flipping realestate in texas. i am purchasing a franchise that will sale retail merchandise. should i have an LLC s-corp, or c-corp, i am still new at all of this. the s-corp is owned by my wife and so will the new business. i will keep my own job for our personal income, and we will eventually draw money from the new business.
william in texas

We, hubby and I, are an LLC. We need to restructure. I Have been researching til I'm dizzy. it seems the best way is an S corp election. Salary is taxable with se tax, but the rest of the profits are not.

We have looked at c corp, but it seems WAY too much at this point. An LLC is not good if you have so much profit you are paying self emp tax on all of it.
Is there anything I'm missing here?

We, hubby and I, are an LLC. We need to restructure. I Have been researching til I'm dizzy. it seems the best way is an S corp election. Salary is taxable with se tax, but the rest of the profits are not.

We have looked at c corp, but it seems WAY too much at this point. An LLC is not good if you have so much profit you are paying self emp tax on all of it.
Is there anything I'm missing here?

I currently have 2 sole proprietorships. They are profitable, but not by much... It has been suggested I form an LLC with the 2 sole-Ps as subsidiaries. Is this do-able? Suggested?
Any comments will be appreciated -

Thanks!

I just formed an S-corp with two partners. I am using my personal funds to buy equipment and expenses such as client meetings(dinners), travel expenses, cell phones...etc as this is required in order to sell our product. my partners input is intellectual property but no financial means. we are going to split equity sharing at 45%, 45%, and 10%. is this possible or does it have to be based on financial input? the start up costs are about 12k, and costs of replacing inventory should be low, but we have numerous buyers wanting product so i am projecting a good amount of profits. what happens to the amount of money that I have used to start up and will use for operations until the company starts to see profits? will I see the tax breaks of the write offs (dinners, travel, sampling, and including running the biz out of our apt) or will they be distributed to all shareholders? thank you for any input.

We are working on a high tech start up and plan to offer stock options to key team members. Does than require a C-Corp? Or can employees get equity in an S-Corp or LLC without cash paid in?

I recently registered a LLC in New York but did not called in to get my ein number because what I was about to use this LLC for fell through. Can I change this LLC to a S Corp. in another state or in New York.

The advantages of an S-Corp work if the persons owning the new entity are natural persons or non-profits. If you have any entity owners, you have to go with the LLC to get pass-through status.

LLC's are great vehicles for joint ventures.

Additionally, if you are investing in appreciable assets, such as real estate, LLC's can be better vehicles than s-corporations for tax purposes. When C- and S-corporations are terminated, assets are distributed to the owners and gains realized from appreciated assets (such as real estate) become taxable at a personal level. In an LLC taxed as a partnership or a sole proprietorship, business assets are considered to be personal assets, and no distribution is recognized when the business is terminated. Therefore, no tax obligation would be realized until you actually sold the assets.

I want to buy and hold real estate property along with other investors, yet management as a general partner. Which structure is best? LLC or s Corp

I own S Corporation. I am thinking of converting from S-corp to LLC. Any advice please?

I came across this webpage while researching a tax issue for a client, but I must say a lot of you guys really need a good accountant. I hate to see people throw away money to the IRS, because they have a bad business formation, or because they received erroneous tax advice from someone who thinks they know what they are talking about.

Anyways, here are a couple answers to the last few posts, and if you need more professional advice, contact me.

babu - Why would you convert out of an S into an LLC? What is the reasoning behind it?

Mike - Real estate dealings are one of the few times I recommend LLC's over S-Corps or C-Corps. Corporations really limit what you can do with property. For instance, I have a client who wanted to give a piece of land he owned in an S-Corp to a family member - sounds simple enough right? Well in a corporation if you move out a piece of property like that you have to treat it as a sale at fair market value, so if you have a piece of land with a 100,000 basis, but it's worth 400,000, then you are going to be paying tax on 300,000 of gain without ever seeing any cash. There are other reasons to not hold land in corps, but I won't delve into those at this point.

Susan - Why would you convert the two sole proprietor's into subsidiaries of an LLC? If you are a single member LLC, you still will file your taxes on a schedule C, because single member LLC's are disregarded as a taxable entity. They are just a legal entity.

I'll try to check more later.

Pete

I am going to start my own business here in Ventura County, Los Angeles. It is a maintenance company doing business or house calls. I am looking at a small investment 30-40k which I plan on taking out on a small Business Loan. I dont want investers because the clientel is already there, I just need to Business Loan and to get started. What would you suggest - an S Corp or an LLC. I do have a partner, but he will be taking on a smaller percentage of the loan than I will. My limted understanding of this is that an S Corp is somthing that can be buildt upon as the company grow whereas the LLC will need to eventually be switched to a C Corp or S Corp down the line if the company grows too much?

For a Hong Kong company forming a wholly owned US subsidiary is an LLC better than a C-Corp?

My Brother-in-law has his own business that he has had for 4+ years. He has now decided that in order to run the business and make profit that he needs help. I will be doing the office work, my husband will be doing the website / tech work and my BIL will be doing the sales and installs of the systems.

I am wanting to know what the best thing to do it. He has an LLC, but I think it is a sole LLC, not a partner (I don't know if it is filed a certain way of if you can decide the way you it seen) Should I/my husband be involved with his LLC, or create our own and bill his business. We will be running the business at a 50/50 split. We don't get a pay each week, but he does.

Any help would be appriciated!

Thanks,
Patricia

I'm looking to start a business in texas with a partner. We are wondering how hard it is switch from an LLC to a S Corp at a later date? Any ideas? Thank you

I'm an independent sales person, I've just added my son to the business to handle some of my paper work. Would you recommend a S corp or LLC in Texas?

Is it possible to convert from and S Corp to an LLC?

We are incorporated in California.

Hi. I am just starting out as a software consultant and I would like to know which type of Corporation I should set up in order to minimize my taxes. LLC, C-corp, S-Corp, or 1099? I will be making about 150K yearly, and I will also sign up for some sort of retirement planning tool such as a 401K or IRA. I don't expect to have any employees. Also, I curretly reside in NC, my work will be in OH, and I plan to move to NJ in 6-9 months. So where should I incorporate? Where would I benefit the most?

Also, from reading about s-corps, my understanding is that any profits that are gained by the corporation, are not subject to the self employment tax (SS & medicare). Is this a correct understanding?

Thanks,
Paul