business formation...

[RRolfe]

ok, I am just starting out on my own and am trying to decide on a formation of my business. Does anyone have any input on LLC Vs S-CORP? Which one is better? and why?

I am completely lost on the whole issue...

[allan]

Are you planning on going solo, or have multiple partners?

[Robert]

An S corporation may have only 75 shareholders, while an LLC may have an unlimited number of members. However, an S corporation may be preferred for one-person companies in states that do not allow one-member LLCs.

LLCs may issue different classes of ownership interest. An S corporation may issue only one class of stock. Advances to shareholders of an S corporation, or buy-sell agreements among shareholders may create a second class of stock that disqualifies the S election. The LLC has no such restrictions.

S corporation shareholders and LLC members may deduct company losses on their individual tax returns to the extent of their basis. LLCs, however, may increase the basis of their membership interests when the LLC borrows money. S corporation shareholders may not increase the basis of their stock when the corporation borrows money or when the shareholder guarantees a corporate loan. An S corporation shareholder may only increase his basis by making a direct loan to the corporation.

LLCs are not subject to certain penalty taxes that apply to S corporations that were formerly C corporation, such as the built-in gains tax and the excess passive income tax. An S corporation may not adjust the basis of its assets upon the death of a shareholder or the sale of stock by the shareholder. An LLC may elect to step up the basis of its assets upon the death of a member of the sale of a membership interest. Therefore, if a shareholder in an S corporation dies, the heirs will receive a step-up in basis for the stock. If the corporation thereafter sells appreciated assets, the gain will flow through and be taxed to the inheriting shareholders even though the appreciation occured before the shsareholder's death. The same problem arises for the person who purchases stock in an S corporation that has appreciated assets.

The S corporation has advantages of the LLC in certain cases. A C corporation may obtain pass-through tax treatment by converting to an S corporation. The conversion does not result in taxation of appreciated assets or other adverse tax consequences, subject to four main exceptions. A C corporation may also obtain pass-through tax treatment by converting to an LLC. However, the conversion is usually taxable. It is treated as a liquidation of the corporation, taxable both to the corporation and to its shareholders.

A second advantage of the S corporation is the tax-free rules for mergers and other reorganizations that apply to S corporations. For example, an S corporation may merge into a C corporation on a tax-free basis. Similar rules do not apply to combinations of LLCs and other corporations.

[RRolfe]

solo at this time.

[RRolfe]

robert, with a s-corp the corparation is a seperate legal entity where as a llc is not.. correct?

[Robert]

An LLC can be a seperate legal entity as well.

Or you can do a DBA (Doing Business As) and form an LLC.

[MrManager]

C/S corporations or limited liabilities are really unnecessary for any business earning below 30-50k per year - particularly if you are just starting out. Sure, incorporating is relatively cheap at about 300 bucks, but if you're just starting out and don't have realistic expectations to be earning revenues exceeding 50k per year, check your business manual- you'll find that incorporating early has no real benefit and typically comes much later - after the business plan has been created, after launch and certainly after your first big client.

My suggestion, get a DBA (Doing Business As), a sales/business license through your city/state and open a merchant account at your local bank. Then, you'll be in good shape to move forward. I really wouldn't give corporations or llc's much thought at this stage.

[RRolfe]

Originally posted by MrManager:

C/S corporations or limited liabilities are really unnecessary for any business earning below 30-50k per year - particularly if you are just starting out. Sure, incorporating is relatively cheap at about 300 bucks, but if you're just starting out and don't have realistic expectations to be earning revenues exceeding 50k per year, check your business manual- you'll find that incorporating early has no real benefit and typically comes much later - after the business plan has been created, after launch and certainly after your first big client.

My suggestion, get a DBA (Doing Business As), a sales/business license through your city/state and open a merchant account at your local bank. Then, you'll be in good shape to move forward. I really wouldn't give corporations or llc's much thought at this stage.


first you say that LLC's and Corps have no real benifet at this stage... and then you basically are telling me to start a sol prop.

wouldn't the fact that the company is a seperate legal entity be a BIG benifit?

[interactive]

I agree with Rakmin, save your butt from getting sued correct?

[RRolfe]

thats what i am talking about.

if something is going to go wrong that is a business killer... when is it more likely to happen.. in the first few months? or in 5 years?

[MrManager]

Originally posted by Rakmin:

first you say that LLC's and Corps have no real benifet at this stage... and then you basically are telling me to start a sol prop.

wouldn't the fact that the company is a seperate legal entity be a BIG benifit?

It's not that they don't have any value at all at this stage - they are a terrific shield from lawsuits affecting you personally. I was approaching this more from an accounting standpoint - until you reach a certain revenue stream, it makes sense to start out as a DBA and avoid the unecessary expense and paperwork until it becomes necessary/beneficial.

But if your eye right now is on protecting yourself legally by standing behind a corporate entity, that would be a great way to do it. My suggestion was simply to start out as a DBA and incorporate when your income reaches the point where a corporation starts providing an ideal tax shelter and other financial benefits you wouldn't benefit from otherwise.

I was only commenting on starting a business based on what is financially necessary or beneficial. Sorry if I was sounding like I was raining on your parade. :)

[RRolfe]

oh no.. your not raining.. i want all opinions.. this is why i asked the question.