The LLC is Just One Form Away From S-Corp Status

If you were to walk into an accountant’s office, and explain to them that you are a small business owner running a sole proprietorship looking to form a company, what type of corporate entity do you think they would tell you to form?  There’s a real good chance the first words out of the tax professional’s mouth would be, “Form an S-Corp”.

In my six years of helping business owners incorporate, I can’t tell you how many conversations I have had with clients that say they need to form S-Corps because their accountants’ told them to. That’s fine from a small business stand-point, avoiding entity level taxation so that profits and losses flow through to the owners is how you’d want to be taxed anyway.  But that’s just it.  IT’S A TAX STATUS!  Many accountants are familiar only with the taxation of a corporate entity, and that’s the way it should be……..that’s what you pay them for.  But when it comes to choosing the type of company that suits your organization’s structure (one person), a corporation is not always the best fit.  You do have options.

After leaving the accountant’s office now you think you need to incorporate, so you start doing some research on the internet for “S-Corp”.   What you’ll find is lots of sites that explain what the S-Corp is but none offer to really set one up for you.  Why is that? BECAUSE IT’S A TAX STATUS!

Now what?  Maybe you try searching “corporation” or “incorporate”.  Well, look out because now you’ve opened the flood gates; oodles of companies willing to help you incorporate overflow into the computer’s tropical fish background.  You start checking out a couple of websites, and gather information about packages and pricing, but still no S-Corp.  Don’t make me say it again…….

Eventually you make a phone call to one of the online incorporators.  The service representative asks how they may help you, and you say, “I need to form an S-Corp”.  At this point you’re already well on your way to forming a corporation.  Next thing you know you’re talking shares of stock, board of directors, officers, meetings, minutes, blah, blah, blah.  Sounds like a lot of work just to become an S-Corp so that your accountant’s job is easier, especially if you were a sole proprietor to begin with.  Rather than forming a corporation, consider forming an LLC instead. That’s right I said LLC.

With the LLC, you all but eliminate the formalities of the corporation while limiting your liability for the debts and obligations of your business.  And best of all, the IRS treats the LLC as a flow through entity by default.  What does that mean?  It means that if things don’t work out with the accountant and you don’t end up electing S-Corp status, you can still file your taxes like when you were a sole proprietor.  This will work for partnerships too.  Regardless of whether you choose a corporation or an LLC, once the entity is formed you’ll still need to file with the IRS to obtain that S-Corp status.  If you go LLC you will only need to file one additional form (IRS Form 8832: Entity Classification Election) to be considered for S-Corp treatment.  So what’s one more form?