When I incorporated my company, Bluyu, Inc., I had a choice to make: corporation or LLC? I picked a corporation and then turned it into an S-corporation. Here is why:
The rules of a corporation are so well developed, that I didn’t need to think about them – I just fill in the circles. The documents to file them are so simple that I have a pack of documents called “sole shareholder incorporation.” Having worked out investment deals, partnerships and multi-seat Boards of directors, I knew I wanted none of it. So, the choices were so easy.
I needed an incorporator to sign the Articles of Incorporation – I picked me. I needed a shareholder to issue stock to – I picked me. I needed at least one director to sit on my Board – I picked me. I needed a president and a secretary – I appointed to the presidency, me, and as secretary, I elected me.
Corporations are required to hold a vote of shareholders each year to elect a Board of Directors and to hold periodic meetings of the Board. To satisfy this, each year, when my annual report comes, I pick up last year’s annual resolution, change the dates, add that year’s events and sign it. However, now I have a CFO and she’s tough – so far in 2010, we’ve had two real board meetings.
I had business expenses I wanted to deduct and I did not want double taxation of profits, so I wanted pass-through tax treatment. Since I have not made a profit yet, I have not had a chance to pay self employment tax. But, that will come.
Cheaper to File a Corporation
When faced with a choice between a $200 corporate filing fee and a $600 limited liability company filing fee, I was penny wise and pound foolish – I picked the cheaper fee.
I was lazy
Setting up an S-corporation was the path of least resistance. I knew that if I set up an LLC, I would need to draft an Operating Agreement. I just didn’t want to. Instead, I went for the simplified Bylaws and form organizational resolutions. I wouldn’t recommend my choice to everyone, because it is not always smart to take the easy way out. But, I had a fool for a client.
UPDATE:Why was it stupid?
Many people have objected to characterizing setting up an S-corp as a stupid decision produced by my own laziness. Apparently, I didn’t explain why it was a stupid choice for me, so I’m updating.
I should have picked an LLC for myself. Here are the reasons:
- If I had picked an LLC, I would have been able to attach the tax reporting to my own tax returns on Schedule C, rather than fill out an S-corp tax return on Form 1120s.
- If I had picked an LLC, it would have been easier to take property out of my company tax free.
- If I had picked an LLC, the other corporate lawyers wouldn’t kick sand in my face when they find out I’m an s-corp. There would be more joy in my life. And, I would be taller.
I can’t tell you what the right entity for you is – I just know that I probably should have picked the more expensive, but flexible, one. However, the great thing is, I can always change, merge, swap or fix, as long as I do it properly and in accordance with the applicable tax laws.
Many people have told me I was wrong to set up as an S-corporation. Want to comment?
April 9, 2012
It’s not that easy to switch out of an S-Corp unless you want to take the double tax hit. There’s a five-year mandatory waiting period if you want to elect out of S for purposes of converting to an LLC.
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