The S-Corp or the New LLC?
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Unfortunately, corporations do not have the same level of protection.
Corporate shares of stock, unlike LLC ownership interest, are considered the personal asset of its owner. Therefore, shares are no different than furniture or car or jewelry. Therefore, if an owner of a corporation had a liability, it is conceivable the owner’s shares of stock could be given up to satisfy its debt, including the voting rights that come with it. It should be noted, a creditor of an owner cannot simply take assets of a corporation. However, it could affect the sale of assets held in a corporation should it have sufficient votes rights to do so.
Therefore, the comparisons between the hybrid structure of an LLC and a corporation dealt not only from a legal perspective but, also the tax perspective, when factoring an S Corporation election. Now, LLC’s did have the ability to obtain the S election but the process was not as simple and most, if not all, usually stayed as a partnership entity status (or disregarded entity status, meaning you filed as a sole proprietorship) for tax purposes. As a result of this separation, if you will, business owners and entrepreneurs generally could not or did not take advantage of both an S Corporation and an LLC.
Consequently, the selection process was relegated to play the game of which is comparatively better for what I’m doing or which of the two would have the least negative effect on my business.
However, in 2013, the IRS made taking the S election for LLC’s easier. In fact, the election process for an LLC uses the same procedure as corporations. Also, if a business has been LLC for more than one year, it can still make the election now; however, the election will not be retroactive if the business has already filed its first tax return and such filing was not an S-Corp filing.
Now, business owners and entrepreneurs don’t have to choose between having an S Corporation and an LLC.
They can now have it their way and take advantage of the benefits of both.
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