If business were a 1980s coming-of-age film, then the S Corporation would be the overlooked middle child at Corporate High School — in other words, the protagonist of the film.
The older, more prestigious C Corporation is the star quarterback, socializes with the Fortune 500 cool kids, and is hardly in need of introduction. The younger LLC, who avoids liability both legal and parental, is easy-going and trendy with the small business crowd.
And then there’s the S Corporation, an unassuming entity often overshadowed by — and defined in relation to — siblings who are exponentially more popular. Nobody really notices the S Corporation, which means it doesn’t get shoved into lockers (unlike the Sole Proprietorship) but also means it doesn’t get invited to the school dances. The S Corporation, though, is worthy of its own spotlight.
In the first place, neither the C Corporation nor the LLC is perfect themselves.
The C Corporation is attractive because its prominence conveys permanence, its non-managing owners are afforded limited personal liability, it offers considerable profit-sharing flexibility, and its ability entertain an unlimited number of investors.
But the C Corporation has issues. It’s complicated and high maintenance, demands an exhausting level of attention, and it’s got expensive taste: as a separate taxable entity, earnings are subject to “double taxation,” which is kind of like getting beaten up for your lunch money and for the replacement money your mom sent over afterward. Essentially, income is taxed when the C Corporation receives it and when the investor receives the dividend from that income.
On the other hand, the LLC is more laid back, particularly when it comes to allocation of profits and losses as well as ownership interests. Furthermore, like the C Corporation, the LLC can invite as many investors to the party as it wants. Yet while the LLC is easy to get along with, it tends to hold back it’s more ambitious friends.
For one, the LLC mooches off your earnings more than the S Corporation.
Unlike the C Corporation, the LLC and S Corporation enjoy “pass through” taxation, meaning the income is taxed only once: when you personally receive it. However, income from an LLC is also subject to a self-employment tax (15.3 percent) for social security and medicare in addition to the standard income tax.
The S Corporation ignores this, provided it offers a sole class of stock with homogeneous rights and maintains a reasonable allocation of profits, losses, and distributions. However, if the S Corporation gets caught playing hooky on the “reasonable” standard, then the IRS suspends it and applies double taxation.
A bigger obstacle to ambition for the LLC is the fact that the venture capitalist cool kids who could make you even more popular gravitate toward the C Corporation. The S Corporation has a distinct advantage here in that, should it choose, it could actually be pretty popular with the cool crowd.
If it became a bit more outgoing, maybe let its hair down or wore matching clothes, the S Corporation could easily turn into a C Corporation in a day. An LLC’s transformation into a C Corporation would entail a full blown, merger likely requiring an attorney.
And nobody wants to deal with the attorney.
So why not give the S Corporation a chance?
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The Fisher Law Office is renowned for its experience in estate planning, probate administration, asset protection, and business development. Annapolis attorney Randall D. Fisher has practiced for over 20 years, maintains the highest peer review rating for ethics (AV Preeminent) by Martindale-Hubbell, and is a sucker for long walks on the fairways.