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    7 Replies Latest reply on Oct 16, 2008 9:58 PM by jschneier

    LLC or S-Corp

    LT Lawn Care Wayfarer

      Community

      For the past two years I've run my lawn care service as an LLC with me being the only owner of the business. I recently decided to merge my business with another lawn care service so that myself and my soon to be new business partner can compete with some of the larger commercial services here in our area.

      Unfortunately we can't agree on a structure for the combined business. My accountant wants me to keep things as an LLC, his accountant wants us to structure as an S-corp, so we can easily transfer shares in the event our partnership (of convenience) does not work out.

       


      Any of the SCORE members or other members of the community have any advice about this matter?
        • Re: LLC or S-Corp
          BDS INC Adventurer
          The S-Corp will make selling your new partners shares easier should the partnership not work out. However it will completely change your accounting and tax filing methods.

          Quick question: Could the two of you remain seperate entities, but bid on jobs collectively? This way the two of you could keep seperate companies, seperate accounting, and still maintain your independence, but at the same time, when you have to compete against larger firms, you could go in together.
          • Re: LLC or S-Corp
            DomainDiva Ranger

            I agree with BDS about the 'S' Corp. However, perhaps you need to go beyond the corporate status selection and get both accountants and partners together in one room. This 'difference of opinion' between partners advisors needs to be sorted out BEFORE you go any further. It could make for big trouble later on. Everyone needs to be on the same page here. You also need to decide WHO will be preparing the entities tax return, obviously both accountants cannot do it.
            • Re: LLC or S-Corp
              MDTaxCPA Newbie
              I agree with both of the above postings esp. regarding the transfer of ownership issues, but from a CPA's point of view I look at things from a tax perspective. I have always been more fond of the S-Corp setup if the revenue warrants it. You can do some really nice tax planning (i.e. saving lots of tax dollars and putting them back in the business owner's pocket) with an S-Corp that is not available with the LLC structure.
              • Re: LLC or S-Corp
                krhtax Newbie
                As an S-corp, your distributions will be based on the amount of each partners contribution. If you want the structure of an S-corp with the flexibility on an LLC, you can, depending on your state laws, form an LLC and then "check the box" to be taxed as an S-corp.
                • Re: LLC or S-Corp
                  Bridge Navigator
                  Let's start by assuming that each of you have good accountants. Now remember that each of them is comming from the perspective of providing advice to their clients (you and your future partner) who may have had different needs. Both accounts might be "right" based on what they know.

                  The most logical thing I heard was to all get in a room and explain WHY. At the end of the day, one of the accountants is out of a job so they may be a little reluctant to agree with each other or say that the other had a "good point."

                  I sell businesses for a living, forgetting your tax consequence, being either an "S" corp. or an LLC will should not effect the value of your business to a third party buyer.

                  I also own three businesses. One is a LLC, One is a "S" corp. For tax purposes, I have elected to have the LLC be taxed as a corporation and then elected "S: status.

                  Form 8832 - Entity classifictaion - elected to be taxed as a corporation
                  Form 2553 - S corp. election

                  If your accountant is not familiar with these forms, get a new accountant.

                  In my opinion, there are some slight tax benefits of being a S corp versus an LLC (again, ask your accountant) and for any business I own myself, I would chose S corp. That being said, I believe that the LLC offers more flexibility when partners are involved. It is giverened by an operating agreement and distributions can be made regardless of "investment."

                  Greg Dupuis
                  • Re: LLC or S-Corp
                    Yardbird Wayfarer
                    There are two questions actually being asked.

                    1) The Legal Entity Structure

                    2) The Tax structure

                    Legal Entity Structure
                    An LLC is a different legal entity than a corporation and has differnt features, some of which may be advantageous and/or other disadvantageous. As a result, you may want to seek legal advice and not tax advice in terms of which type of entity best meets the needs of the new company.

                    Tax Structure
                    As alluded to in another email, you can elect the tax treatment of an LLC as follows:

                    Single Member LLCs can be taxed as a sole proprietor (Schedule C on your personal return), an S-Corp, or a C-Corp dependent upon the election at the time the LLC is established.

                    Multiple member LLCs can be taxed as a partnership, S-Corp or a C-Corp again dependent upon the election at the time the legal entity is established.

                    Accordingly you can have an LLC legal entity and yet be taxed as an S-Corp. The only significant advantage of an LLC in my opinion is if you want to limit liability, yet be taxed as a partnership, which provides greater flexibility in terms of income allocations Vs a S-Corp where income is allocated strictly on the percentage of stock ownership. Otherwise I don't see a big advantage of an LLC.

                    The real question is what are you trying to accomplish as a business and which legal entity form and associated tax treatment best accommodates this effort. The advice of all parties can be valid, but ultimately what the principals want to accomplish will typically drive the answer as to both entity and tax structure.
                    • Re: LLC or S-Corp
                      jschneier Newbie
                      All the answers are pretty insightful. I'll just add a couple more points. Every State is different as to the levels of protection from liability for the two entities and the levels of formalities and filings. These differences should be considered depending on the state you are in. Ask the attorney and accountant what the general costs per year for them to maintain each will be. One major consideration in a labor intensive business like yours is that as an LLC, you do not have to pay worker's compensation and unemployment on yourselves. In a Corporation, you do. The Corporation will also have payroll to deal with instead of simple distributions. Run these questions by the accountant as well.