Discussion:Llc taxed as s corp vs s corp

i do like the easy ability to change formations though (every 5 years of course).

A (properly set up and managed) corporation (or LLC) protects the stockholders' (or members') assets from claims by creditors of the corporation (or LLC) ("inside-out" liability protection). It does not protect the assets of a corporation from claims by creditors of the stockholders ("outside-in" liability protection). A creditor of a stockholder may obtain the stock of the corporation in satisfaction of its claims, and thereafter stand in the shoes of the stockholder. If the debtor owns a majority of the stock, this allows the creditor to cause the corporation to distribute earnings or capital or sell assets to satisfy the creditor's claims. By contrast, a creditor of an LLC member can, in many states, obtain only a charging order, which gives the creditor the right to any distributions of income or capital from the LLC, but does not give the creditor the power to cause the LLC to make any distributions or to sell or otherwise dispose of its assets. Thus an LLC may provide both inside-out and outside-in liability protection, while a corporation provides only inside-out protection.

So if your client comes in and says he organized an LLC because his attorney told him to, that's probably why. Whether it works, or is necessary, may vary from case to case and from state to state and from court to court.

But there still isn't a whole lot of case law. And I see a lot of the attitude expressed by Wwtaxes above -- LLCs are a lot less complicated to keep up -- no minutes, meetings, etc. We all know how hard it is to persuade a client that there is a difference between himself as an individual and his wholly-owned corporation -- the SMLLC has to be ten times worse. And while LLCs don't have all of the hoops to jump through that a corporation does, it's just as important (IMO) for an LLC to be kept strictly separate from its owner(s) as it is for a corporation -- separate bank account, good books and records, etc. Otherwise, surely smart lawyers are going to pierce the LLC veil, especially with SMLLCs.

Thank you for your detailed explanation, but aren't you missing another key difference? If the start-up venture is expected to lose money at first, the tax basis for an S corp & LLC can be different. For a LLC, the Basis includes cash & stock contributions, loans made to the venture & loans personally guaranteed. A S corp is similar EXCEPT loans personally guaranteed are not include in the basis. So if you have other income & finance a start-up that is expected to register initial losses, a LLC may boost the amount of losses you can claim. Again the classic consultant answer..."It depends..."

Some of us have come to accept that there's no such thing as an LLC under the tax laws: it's either disregarded, or a partnership, or an S corporation. It's not an LLC anymore, after it's been determined what we will see it as. Some of us disagree with that answer.

it converts to an LLC which has elected to be taxed as a corporation (C Corp).  It is still an LLC, whether you can see it or not (or whether you believe it or not, as Harry implies).

Which could be disregarded SMLLC owned by an individual, C Corp, or S Corp, OR a MMLLC taxed as a partnership.