Posted on January 12, 2009 by Joseph M. Wallin

Why I Like S Corporations Better Than LLCs As An Entity Choice For Technology Startups

Text:

"I like S corporations better than limited liability companies as a choice of entity for technology startup companies for the following reasons.  

1. S corporations can engage in tax free reorganizations, such as tax free stock swaps; in contrast, limited liability company owners have to pay tax on stock received in such transactions.

2. S corporations can grant traditional types of employee equity, like stock options, more easily.

3. S corporations can more easily convert to C corporations in the event of a venture financing or public offering."
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Posted on October 20, 2008 by Joseph M. Wallin

New Treasury Regulations on S Corporations and Shareholder Open Account Debt

"SUMMARY: This document contains final regulations relating to the treatment of open account debt between S corporations and their shareholders. These final regulations provide rules regarding the definition of open account debt and the adjustments in basis of any indebtedness of an S corporation to a shareholder under section 1367(b)(2) of the Internal Revenue Code (Code) for shareholder advances and repayments on advances of open account debt. The regulations affect shareholders of S corporations and are necessary to provide guidance needed to comply with the applicable tax law." You can review the regulations here.

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Posted on July 30, 2008 by Joseph M. Wallin

Limited Liability Companies as S Corporations?

You might ask:  Why do this?  Maybe the answer is: just because you can.  It is clearly possible for a state law limited liability company to elect to be taxed as a corporation and then make an S corporation election (if the entity otherwise qualifies to make such an election).  The question is--why?

The explanation has to lie with applicable state law.  Possible state law law explanations include:

  • The applicable state limited liability company statute is more favorable than the applicable state corporate statute.
  • Perhaps, for example, because the state law on limiting the liability of the managers of the LLC is more favorable than the state law limiting the liability of directors and officers of the corporation.
  • Or perhaps because the state law with respect to the governance of the LLC is more favorable than the state law with respect to the governance of the corporation.

In the author's opinion, whatever is to be gained in these regards is overshadowed by the complexity of the set up, and the confusion that it is likely to generate in future due diligence questions.  In most if not all cases the author believes that this choice of entity is likely to be more trouble than it is worth.

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