I am frequently asked by founders of new businesses who want a pass through company for tax purposes whether they should organize their new company as an S corporation or a limited liability company. It depends on the circumstances, but if the founders anticipate having a company which will grow rapidly, want to grant equity compensation to many new hires, and ultimately may either go public or be sold in an M&A transaction, I recommend an S corporation (assuming the entity qualifies to make an S corporation election), for the following reasons:
- S corporations can engage in tax free reorganizations, such as tax free stock swaps; in contrast, limited liability company owners have to pay tax on stock received in such transactions;
- S corporations can grant traditional types of employee equity, like stock options, more easily; and
- S corporations can more easily convert to C corporations in the event of a venture financing or public offering.
That is not to say that a limited liability company may not be the right choice of entity in certain circumstances, but frequently S corporations are a better choice.
By The Obligatory “Corporation or LLC, DE or [Your State Here]” Post : The Neighborhood Entrepreneur April 25, 2011 - 12:54 pm
[…] Many lawyers have covered this topic, perhaps too many. And many have taken the legal approach to comparing and contrasting the differences between a corporation and an LLC. I think these are all fine articles and fine ways of approaching this topic. So, I won’t bore you with repeating what they have said. Instead, I’d like to discuss a couple of business factors to consider when making your choice. Regardless of what entity or state of formation you choose, your decision is neither final nor fatal. […]
By Ed Boyle June 19, 2012 - 10:36 am
why start with an S corp election if expect to raise VC financing and need to convert to C-corp?
By joewallin June 19, 2012 - 10:45 am
Ed, the founders may want to take advantage of the losses flowing through to them during the period in which the corporation is an S corp–prior to taking VC funding. Sometimes the founders will be contributing significant sums of money to the corporation to pay salaries, etc., and the flow through of these expenses to their individual tax returns will have significant value to them.
By Ed Boyle June 19, 2012 - 10:50 am
that makes sense…thanks!