Is it Better to Organize as an LLC or an S Corporation?
Transcript:
Jonathan: Hello, I am Jonathan Barlow, I'm a partner attorney at Clear Counsel Law Group. We have many business clients who own small businesses or large businesses here in Nevada and often when they come in to see me to talk about opening their business or starting their business, they ask me, "What's the best way to create the business?" Or "What corporate structure should they use?" Often, they ask me what's the difference between an LLC and an S corporation, so let me answer that question for you. What's the difference between an LLC and an S corporation? An S corporation really deals with the tax code and how income is taxed under the tax code. In general, an S corporation will treat all income at the partner level. What that means is that the corporation, the business entity itself, doesn't have to pay a tax when it receives a money. When the money comes out to the owners of the business as distribution of profit, that's where the partners or the owners of the business are taxed at that level. It avoids the double taxation of traditional corporations.
Now a LLC can choose to be taxed like an S corporation. Even though it is an LLC, it can make an election and say, "We want to be taxed like an S corporation," meaning flow the income down to the owners and the owners then pay the income tax. Alternatively an LLC can choose to be taxed as a partnership. So really it becomes a question of do you want to be taxed as a partnership or as an S corporation? That's the main difference when dealing with an LLC or an S corporation. Typically most businesses will choose to simply choose to do business as an LLC because they have that option of either being treated as a partnership or an S corporation under the tax laws. Brian has a question about that as a small business owner himself.
Brian: Sure. Can you give an example of why a business might want to organize as an S corporation?
Jonathan: Sure. Typically you would want to organize as a corporation as opposed to an LLC, usually the main advantage is if you're thinking about possibly going public at some point down the road, that is one of the main advantages, it's easier to go public, meaning having your stock offered for public purchase on the stock exchanges, things like that. That's typically when you'd want to choose to be an S corporation. Otherwise like I said, an LLC is more flexible, it has the same advantages of the S corporation because you can choose to be taxed like an S corporation, but you don't have the same restrictions as a corporation does in its annual document requirements and things like that. Yes Brian?
Brian: If you are organized as an LLC, can you reorganize as an S corporation if you want to go public?
Jonathan: That's an interesting question. Yes, that would require if you want to change to be able to go public, now an LLC could go public itself but there are things that have to happen, elections have to take place in order to change to an S corporation, the LLC can make an election with the state of Nevada and change its corporate status. There are filings that can be done to do that. If you're thinking about starting your own business, wondering whether you should be an LLC, an S corporation, a C corporation, how you should structure your business and what's the best for your business, I encourage you to give me a call at 702-476-5900 and I'll answer any questions you might have about an LLC.
