Should I classify my company as an S corporation or a LLC?

  • Updated: April 18, 2010 - 10:36 PM

Q Should I classify my company as an S corporation or a LLC?

I got advice from my attorney and accountant before starting my business and went the S corporation route. But now I'm hearing the LLC is the better option. If so, can I change corporation categories easily?

ROSHINI RAJKUMAR

ROSHINI MULTI MEDIA

A There is no simple answer on whether a limited liability company (LLC) is a better route than an S corporation -- a type of corporation where the company's taxes are paid by its shareholders -- because it varies so much from situation to situation. In general, an LLC may be a superior in the day-to-day running of the business, but there may be advantages to the S corporation, especially when it comes to the distribution of the income.

You have to discuss the pros and cons of the various legal structures and the tax consequences with your attorney and your accountant. They will give you guidance on which business entity is best suited to meet your goals and whether it would be wise for you to switch. You can convert from one to the other, but there may be costs and tax consequences.

Generally speaking, your choice of the best business entity should reflect your goals. Are your goals liability protections? Tax advantages?

Think also in minutiae. Would converting to an LLC create significant tax liabilities for the shareholders of the former S corporation? Would the owners have a gain on the liquidation of their stock? How do the organizational and annual filing fees compare? What are the procedures and requirements to conversion imposed by the secretary of state's office or by the IRS? Do you need a new employer identification number?

Again, make certain to discuss any changes with your attorney and accountant who have experience in this area and know your personal goals and business.

(Note: This answer provides generic and general information only and does not constitute legal advice.)

JOHN T. WENDT

DEPARTMENT OF ETHICS

AND BUSINESS LAW

OPUS COLLEGE OF BUSINESS

UNIVERSITY OF ST. THOMAS

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