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Instead of Forming an S-Corp, Consider an LLC
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Instead of Forming an S-Corp, Consider an LLC


By Paul Sponaugle Tuesday, September 7, 2010

If you were to call accountant's office and explain that you are a small business owner running a sole proprietorship looking to form a company, it is very likely the accountant would tell you to form an S-Corp. However, that is not necessarily the best or smartest option.

In my six years of helping business owners incorporate, I can’t tell you how many conversations I have had with clients who say they need to form S-Corps because their accountants told them to do so. That’s fine from a small business standpoint; it helps you avoid entity-level taxation so that profits and losses flow through to the owners—that's how you want to be taxed, anyway. However, keep in mind that S-Corp election is just a tax status. Many accountants are only familiar with the taxation of a corporate entity, and that’s the way it should be, since that's what you pay them for. However, when it comes to choosing the type of business entity that best suits your organization’s structure, a tax professional may not be the best person from whom you should take advice. Instead, ask a business formation specialist, like the team at Harvard Business Services, Inc. The truth is, a corporation is not always the best fit, and you do have other options.

Rather than forming a corporation and worrying about shares of stock, a Board of Directors, officers, meetings, minutes and all the other formalities associated with owning a corporation, consider forming an LLC instead. Yes, an LLC.

With an LLC, you all but eliminate the formalities of a corporation while limiting your liability for the debts and obligations of your business. Best of all, the IRS can treat an LLC as a flow-through business entity if you so desire. Once you create your LLC business entity, you'll need to file an additional form with the IRS in order to obtain S corporation status. First, however, you should obtain an EIN (Federal Tax ID Number) from the IRS for your LLC; next, file Form 2553 with the IRS in order to classify your LLC as an S corporation. Note: According to the IRS, "LLC's electing classification as an S corporation are not required to file Form 8832 to elect classification as a corporation before filing Form 2553. By filing Form 2553, an LLC is deemed to have elected classification as a corporation in addition to the S corporation classification."

 

Source:     United States. IRS. "Taxation of Limited Liability Companies." IRS.gov. Nov. 2014. Web. 29 December 2015.

 

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