LLC vs S Corp - It’s not what you think

Wondering if you should run your consulting business as an S Corporation or as an LLC?

That’s the wrong question.

Let me explain.

First, let’s address what an “LLC” is and what an “S Corporation” is.
LLC stands for Limited Liability Company. When creating a business, you make numerous choices about the business’ formation such as who will own it, in what proportion will owners have ownership, who is responsible for decision making, etc. You also choose how the business will be structured for legal purposes under state law.

A Limited Liability Company is one structure option. Alternatives are sole proprietorships, partnerships, and corporations.

Different structures result in different legal protections & obligations under applicable state law. For example, while an LLC or a corporation may shield its owner’s assets from a lawsuit against the company, a sole proprietorship may not afford such protection.

An S Corporation, by contrast, is a function 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 or corporation - to obtain a certain federal income tax treatment for the company owner(s).

Explained this way, we can understand that the terms “LLC” and “S Corporation” are not mutually exclusive and that the same business can be both an LLC and an S Corp at the same time.

We can also understand that knowing a business is an LLC - in and of itself - tells us nothing about the company’s federal income tax status. Is the company an S Corporation? It might or might not be.

Now you can look at the questions “do I need an LLC?” and/or “do I need an S Corporation?” and see that it will actually be more helpful to step back and ask a broader 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.

There’s no one-size-fits-all here.