Should I Stay an LLC or Go S-Corp?
A limited liability company, LLC, blends the personal asset protection of a corporate entity with the operational freedom that partners get in a partnership business. An S corporation exists as a corporate entity and is intended to provide small business owners with the benefits of incorporation, minus the operational drawbacks that typify corporations.
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Ownership
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If you want to take your company global by allowing foreign investors, you should stay an LLC. S corporations do not allow foreign individuals or businesses to own stock in the company. As an LLC, foreign individuals and businesses can own membership interest in the business. In addition, if you have other businesses investing in the company, like a corporation or a partnership, you should continue to operate as an LLC. Other corporations, partnerships and limited liability companies cannot have an ownership interest in an S corporation.
Formalities
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Running an LLC requires less formalities to deal with as opposed to a S corporation and far less paperwork. Unlike an S corporation, LLCs do not have to file Form 2553 with the Internal Revenue Service to create the entity. Owners of an S corporation have to hold at least one annual meeting, and the company must keep minutes from each meeting. Shareholders of an S corporation have an obligation to select one or more individuals to serve on the company's board of directors. This requirement does not apply to an LLC. Furthermore, S corporations have a duty to create financial statements that indicate the company's financial position at a given point in time. LLC businesses do not have to create financial statements.
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Flexibility
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Owners that desire greater flexibility should operate as an LLC, as opposed to going the S corporation route. An S corporation must adhere to a specific organizational structure consisting of shareholders, directors and officers. Shareholders of an S corporation may hold officer and director positions within the company. LLC members have the ability to manage the company's affairs on a daily basis, or have less involvement in the company's affairs by designating nonmembers to manage the company's affairs. In addition, S corporations have to divide the company's profits and losses, according to each shareholders ownership interest in the company. LLC members can receive profits and losses from the business that do not correspond with their ownership percentage in the company. For example, a member of an LLC may have a 25 percent ownership interest in the business, but he may receive 30 percent of the company's profits and losses.
Raising Money
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You may want to consider converting the LLC to an S corporation if you want to issue stock to potential investors. An LLC cannot issue stock, but an S corporation has the ability to issue one class of stock to potential investors. Offering shares of an S corporation can help the company attract employees, whereas an LLC may have to offer a higher salary as a way to attract talented employees.
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