Choosing to form an S corp

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Dear Tax Talk,
We started our own small construction company this year and have been running it as a sole proprietor with three to six employees in Washington state. We now want to become an LLC or S corporation. I have been reading that it is best to become an LLC and elect to be taxed as an S corp.

We talked to our accountant, and he doesn’t understand why anyone would do this. He said just go with either LLC or S corp. Now I’m more confused after all I have read and what our accountant told us. Please explain why someone would go LLC and elect to be taxed as an S corp, versus just going S corp? Also, what is the difference in S corp and Subchapter S corp?
— Jennie

Dear Jennie,
Don’t believe everything you read. Your accountant is right: It doesn’t make much sense to form an LLC if you really want an S corporation. From a tax standpoint, an LLC that makes an election to be treated as an S corporation is the same animal as a corporation that makes an S corporation election.

From a legal standpoint, an LLC is practically the same as an S corporation. I have previously discussed the advantages of Subchapter S status for an operating business over the rules that apply to an LLC taxed as a partnership. An LLC is good for owning rental real estate. It is not so good for operating a business, as there are additional hidden tax costs associated with it.

In Florida, I found that an LLC that is to be treated as an S corporation was advantageous on a couple of occasions — one of which has been eliminated. The annual renewal fee in Florida for an LLC’s charter was $50 when the corporate fee was $150. This changed in 2008, and the renewal fees for an LLC went up to $138 (of course they could have bought down the corporation’s fees, but they didn’t).

The other reason is that in Florida an LLC can have the same name as another LLC or corporation, whereas the opposite is not true. I had a client that absolutely wanted his corporation to be known by his initials, which were taken. Since he really only wanted to be treated as an S corporation, we were able to do the LLC and get the desired name and tax status.

Subchapter S corporation is the same as S corporation. Subchapter S is the part of the Internal Revenue Code where the rules pertaining to S corporation are found.

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