Ok, so that is not completely true. However, in my daily perusal of internet forums and blogs, I have seen this issue come up time and time again, misguided “legal advice” propagated, usually, by non lawyers or non tax professionals. The concept of an “S Corp” usually arrives as an answer to someone’s query, “what kind of company should I form?” What follows is a slough of hit and run responses regarding LLCs, C-Corps and S-Corps. Most of the answers tend to be harmless, but missed points, on corporate structures and the importance of how you structure your company. Inevitably, someone chimes in with the benefits (or lack thereof) of an S-Corp as an entity. And herein lies the issue.
There is no such thing as an S-Corp as an entity. You will not be able to go to your Department of State of ___________ Corporate Division and set up an S-Corp. You can set up corporation, a limited liability company, a limited liability partnership, a professional association, a limited partnership, or even a limited liability limited partnership. S-Corp is a tax election with the IRS (and some state tax revenue services). Once you have created your entity, certain entities are eligible for S-Corp status. The basic goal of S-Corp status is flow through taxation, i.e. the profits of the company are directly attributed to the equity holders. This differs from C-Corp, the default election for some entities, whereby, the profits of the entity are taxed at the company level, and distributions, dividends, or other capital gains are taxed at the equity holder level. There are other elections depending on the entity created. There are also limitation on election (For example, you cannot elect for S-Corp status if any equity holder is not a naturally born person). Creating the proper entity and pairing it with the right tax election completely depends are your business, your equity holders, and your long term goals.
There is no magic formula when choosing an entity. Don’t turn to document mills and quick service form generators either. If you are unsure of the structures, most likely the automated systems that help you “choose” the right entity are not going to properly inform you of your choices, nor will they inquire into the long term prospects of your company. Don’t get me wrong, plenty of people create entities every day on a whim and probably land on their feet in the end. That being said, why take the risk? Mistakes made now may not show their heads until later down the road. If you have found yourself scanning google searches and yahoo answer boards for the answer, the truth is, it is time to seek the advise of a professional. Find an accountant or an attorney that specializes in small business and let the guide you to the proper entity.