Frequently Asked Questions
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All rights reserved.
- Corporation or Limited
Corporation or Limited
We are often asked the question of
whether to establish a new company in the form of a corporation or limited
liability company. This is a very complex question, involving many
factors, including anticipated tax and growth issues. Therefore, you
should always consult with your particular advisors.
As a general rule, our office
follows some guidelines for general discussion:
1. Corporations and limited liability companies are legal entities with
presumed limited liability protection for the shareholders. However, the
corporate entity has a tried and true existence for many years and, all things
being equal, remains our entity of choice. Corporations offer great
flexibility and protection. Corporations are the entity of choice to "go public"
in an initial public offering. Corporations also offer tax qualified stock
2. Corporations have the detriment of "double taxation"; that is, for $100
of profit, the corporation pays an income tax, then the remainder that is
distributed to shareholders is taxed again to the recipients. This is
effectively like being in the 55% tax bracket. For smaller businesses, a
corporation and make a Subchapter S election. This tax election, called an
"S" election, or S corporation, allows the corporation to be taxed similarly to
a partnership. Partnerships themselves do not pay taxes, but the income
"flows through" the corporation and is taxed directly to the partners at their
personal tax rate, on a pro-rata basis relative to ownership of the partnership.
S corporations offer the best of both worlds: limited liability and taxation
like a partnership.
3. The downside of an S corporation is that it is limited to one class of
stock, 75 shareholders, no non-resident alien shareholders, no corporate
shareholders under certain circumstances. Usually, it is the one class of
stock and corporate shareholder issue that presents challenges for structuring.
4. LLC's are technically historically partnerships with limited liability.
Therefore, LLC's are taxed as partnerships, unless you prefer otherwise.
As the same time, LLC's do not have the long legal history such as corporations.
LLC's have only been recognized as legal entities in more recent years.
And, for many years, taxation of LLC's was in dispute. Therefore, the case
law relating to taxation and governance is less assured. Unlike the LLC
statute, the corporation statute has much more definitive rules, and a long
history of case precedent.
5. Where LLC's perform best is when an S corporation will not work because
flexibility is required in structuring, such as two classes of stock.
However, because LLC's permit such great flexibility, care must be taken in the
structuring. A blank slate can be a good thing or bad thing, depending
upon the circumstances. LLC's present excellent opportunities for joint
6. That said, here's a common thought process:
a. A single resident shareholder. No plans to have corporate shareholder.
No need for multiple classes of stock. No fancy structuring. A
simple small business desiring limited liability. We often recommend S
b. Any time an S corporation will not be available and the flow through
tax is desired, then we often recommend an LLC. If the client has the goal
to become a public company, then it is a trade-off between a C corporation or
temporarily an LLC until the IPO.
We know of some firms that recommend
LLC's for all purposes because of the flexibility. We do not share that
perspective. LLC's are very flexible entities for structuring, but, if the
flexibility is not needed, then the LLC creates risk, particularly for a single
member LLC. S corporations have, of course, worked splendidly for many
Therefore, in short, we start with
the presumption of forming limited liability entities in the form of S
corporations, then evaluate the particular circumstances of our client to
determine if we should override the presumption for an LLC.
Our office establishes many
corporations, s corporations, LLC's, partnerships, limited partnerships, etc.,
for our clients and would be glad to assist you with implementing your business
See also our publication on
Structure and Choice of
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