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Is This Subchapter S Corporation Really Necessary? By Cliff Ennico www.creators.com "I am considering starting up a small business in the near future. In talking to accountants and lawyers, I could not find anyone who would even consider setting me up as a subchapter S corporation. They are all insisting I form a limited liability company (LLC) because it is supposedly more simple and straightforward to operate. Still, I've heard from some other folks - admittedly they are not attorneys - that tell me the LLC doesn't offer the same level of protection against liability as subchapter S corporations do. Who is right here?" Well, being a lawyer myself, I'm going to give you that most lawyerly of answers . . . "it depends." The lawyers and accountants you spoke to may be a little behind the times. I'm actually seeing an increase in subchapter S corporations in my own law practice, and there are a number of reasons why they still make sense for a lot of small business startups. Here are several: High Cost of Forming LLCs in Some States. In a few states, including New York and California, LLCs are more expensive to form than corporations. New York requires LLCs to file a "legal notice" (basically, a classified ad) in two newspapers of general circulation in the county in which the LLC does business for a period of six consecutive weeks. In some of the bigger cities in that state (such as New York City), the cost of publishing that notice can be hundreds or even thousands of dollars. Corporations in New York don't have to publish the "legal notice". In California, LLCs are subject to a "minimum tax" of $800 each year, whether or not you make money, which corporations don't have to pay. Compensating Owners. Owners of an LLC (called "members") have to pay income and self-employment taxes (FICA, FUTA and Medicare) on 100% of the LLC's profits. By forming a subchapter "S" corporation, the owners (called "shareholders") can put themselves on the corporation's payroll and withhold federal and states taxes with each paycheck, just like regular employees, which can save thousands of dollars in FICA, FUTA and Medicare taxes each year. Perpetual Existence. An S corporation has perpetual existence. An LLC is usually formed for a limited duration, and many states still require LLC owners to include a "dissolution date" in the Articles of Organization or Certificate of Formation that gives legal birth to the LLC. There are a lot of old LLCs with "expiration dates" out there that the owners have completely forgotten about. The Perception of Size. Although there's no reason why an LLC couldn't "go public" or otherwise become a large company, there's still a perception, especially in the investment and venture capital communities, that "LLC" means "small potatoes, Mom and Pop, not meant to grow big." Not true, but if you're looking to raise outside capital beyond your "friends and family," you need all the help you can get. Employee Benefits. It is easier for corporations to set up health insurance programs and other employee benefits than LLCs. Also, there are some employee benefit plans, such as profit sharing plans, that are available only to corporations. Other Tax Benefits. If your LLC acts as a contractor for other companies, they are required to send you Form 1099 at the end of the calendar year reporting how much they paid you. They don't have to send you a Form 1099 if you are a corporation. Better Protection Against Liability (??). There is no real evidence for this, but a lot of people, including some professionals, believe that corporations provide you with more ironclad protection against legal liability than LLCs do. In these highly litigious times, with people increasingly likely to sue because the bad economy makes it likelier people will default on contracts, you need all the protection you can get. And if forming a subchapter "S" corporation discourages even a single person from suing you, it's worth the extra time and trouble of setting one up. The disadvantages of subchapter "S" corporations are well documented - they're (usually, in most states), more expensive to form, are more of a hassle to operate, can be owned only by certain types of people, are difficult to convert to LLCs, and so forth. But the subchapter "S" corporation is far from dead, folks. When forming a new business, don't assume the LLC is the only way to go - talk to an accountant or lawyer and have her evaluate the "pros" and "cons" of both LLCs and subchapter "S" corporations with your specific business in mind so that you can make an informed decision you can live with for the long term. Cliff Ennico ( cennico@legalcareer.com ) is a syndicated columnist, author and former host of the PBS television series 'Money Hunt'. This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state. To find out more about Cliff Ennico and other Creators Syndicate writers and cartoonists, visit our Web page at www.creators.com . COPYRIGHT 2008 CLIFFORD R. ENNICO. DISTRIBUTED BY CREATORS SYNDICATE, INC. Permission granted for use on DrLaura.com.