5 Smart Things About the S-Corporation

Previously, I wrote about why I love a Limited Liability Company. I want to show some love for the S-Corp, the ugly older child of the LLC (and the entity type of this website’s owner, Profit and Laws, Inc., an Illinois corporation).  What is an S-Corporation? An S-Corporation is a C-Corporation that has been converted to pass through tax treatment. You get that pass through tax treatment by filing an S-election on IRS Form 2553.
Why do I love the S-Corp? Here are 5 reasons:

1.  Like your college roommate on Saturday night – Easy and Cheap

Articles of Incorporation are usually cheaper to file than LLC Articles of Organization.

2.  Predicable

S-Corporations have over 200 years of corporate law to fall back on, so figuring out the rights and duties under an S-Corp is easier. Why? Because there is lots of case law that has already figured out the answers to most questions. And, there are terrific books out there that analyze the answers for you. (I’m talking about you Folk on Delaware.) Let me give you an example. Every once in awhile, a director will call me and say, “I can’t be at the Board meeting. So, the Board Chairman has my proxy.” Then, I have to tell him that, unfortunately, under most corporate laws, directors cannot give a proxy – they either show up and vote or sign a written consent or they don’t. But, under the much newer LLC, I suspect that LLC managers can give a proxy to another manager, since LLC statutes are much more permissive, but I’m not really sure. To figure it out, I would look at the operating agreement, statute and the case law. Unfortunately, there is not a ton of case law yet, because LLCs are relatively new. And, it’s likely that the operating agreement and the statute are silent on the issue. So, I have to guess. And, that makes me squeamish.

3.  They are Simple

The IRS has lots of rules about what you can and can’t do with an S-Corp. One of the most important is that no business can own shares in an S-Corp.  Also, you can’t have more than two classes of stock and those 2 classes have to have the same rights to money. Because of the IRS restrictions, there is a limit to the amount of complications you can interject into the S-Corp. That’s nice.

4.  Less Self-Employment Taxes

In S-Corps, your self employment taxes for FICA is reserved to just the amount you get as compensation. In an LLC, you pay self employment taxes for your share of the profits up to a max (currently $106,800).

5.  They Make Tax Lawyers Crazy

Want to get a tax lawyer mad? Tell them you prefer to set up new companies as an S-Corp. They get very upset and start putting down accountants. It’s weird.

And you?

Want to agree? Add to? Disagree? Please…