S-Corp or LLC?

The most popular question from new business owners.

The answer to this question starts with an explanation about legal entities and tax classifications. Don’t fret – we know this is confusing. When you come into our office we’ll explain it all (in plain English). But for those of you who are interested in geeking out over this stuff, read on.

It’s important to understand that legal entities are created under state law. In Maine, in order to create your business entity you file with the Secretary of State (in addition to several other steps that your lawyer can explain). The list of entities that you could form generally fall under three categories: Corporations, Limited Liability Companies, and Partnerships. When you sit down with your business attorney to form one of these entities, he or she will likely have lots of questions for you about your business, as each entity type allows for different operating structures and flexibilities. 

Once you have selected a legal entity to form, you will have to select how that entity will be taxed. This is a separate (but related) decision from what your legal structure will be, and often this creates confusion. For a tax classification, you will have several options, and those options will be determined by the legal structure you have chosen. Depending on the legal structure of your business, you may elect to be taxed as a Corporation, S-Corporation, Partnership, or Disregarded Entity. These options are tax classifications only.

You will notice that there is some overlap in the names of the legal entities and tax classifications. You will also notice that S-Corporation only falls under the tax classification category. This is because there are several kinds of legal entities that could elect to be taxed as an S-Corporation. In fact, it’s possible (and not uncommon) to form an LLC that is taxed as an S-Corporation.

There are benefits and drawbacks to each type of entity and each tax classification. These are important decisions with serious consequences that can mean more tax and more legal fees. We can help you navigate the question of LLC or S-Corp, and help you avoid any expensive mistakes.