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I’m starting a new business. Should it be an S Corp or an LLC?

Joann North

Answered By

Alicyn McLeod

CFO at Agate

Alicyn@agatecpa.com

Question:

I’m starting a new business. Should it be an S Corp or an LLC?

Answer:

That’s actually the wrong question!

LLC stands for Limited Liability Company. It’s one of several legal structure options to allow you to create a business of federal tax law. Think of an S Corporation as a federal tax plastic wrap that you can use to cover a business entity – such as an LLC – to obtain a certain federal income tax treatment.

In short, the terms “LLC” and “S Corporation” are not mutually exclusive, and the same business can be both an LLC and an S Corp at the same time, only one of each, or even neither.

Now we can look at the question, “Should my new business be an S Corp or an LLC?” and see that it will actually be more helpful to step back and ask a different question: “Does my business need some sort of special legal and/or tax structure?”

How your business can best be structured for legal purposes is a question for your corporate attorney. How your business can best be structured for tax purposes is a question for your tax advisor. Both will want to know answers to questions such as what industry you’re in, what your exit strategy is, who the owners will be, what profit levels you expect and how quickly you expect to reach them, your appetite for administrative inconvenience to obtain tax efficiency, etc.

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